Americans have grown fond of “buy now, pay later” services, but the “pay later” part is becoming increasingly difficult for some borrowers.

Buy now, pay later loans allow users to pay for items such as new sneakers, electronics or luxury goods in installments. Companies like Affirm, Afterpay, Klarna and PayPal have built popular financial products around these short-term loans, especially for younger borrowers who fear endless credit card debt.

Now, as the industry accumulates clients, delinquencies are increasing. Inflation is putting pressure on consumers, making it difficult to pay off debts. Some borrowers don’t budget properly, particularly if they’re persuaded to take out multiple loans, while others may have been credit risks to begin with.

“You have an industry with a higher concentration of subprime borrowers in a market that hasn’t been tested effectively (this kind of economy), and you have kind of a toxic brew of worry,” said Michael Taiano, an analyst at Fitch Ratings. , who co-wrote a report in July highlighting some of the industry’s concerns.

The most popular type of buy now, pay later loans allow for four payments over six weeks: one payment at the time of purchase and three others that borrowers often try to time with payment periods. Longer-term loans are also available for larger purchases. Most short-term loans are interest-free. Companies that charge interest can clearly state how much a borrower will pay in finance charges.

Given those features, consumer advocates and financial advisers had initially viewed buy now, pay later plans as a potentially healthier form of consumer debt if used correctly. The biggest concern was late fees, which could act as a hefty finance charge on a small purchase if a borrower falls behind on a payment. Fees can be as high as $34, plus interest. But now that delinquencies are rising and companies are becoming more aggressive in marketing their products, advocates see a need for additional regulation.

The industry is growing rapidly, according to a report released by the Consumer Financial Protection Bureau. Americans took out roughly $24.2 billion in loans in buy now and pay later programs in 2021, up from just $2 billion in 2019. That industry-wide figure is expected to rise even more. Klarna customers bought $41 billion worth of products on its service globally in the first six months of the year, up 21% from a year ago. At PayPal, revenue from its buy now, pay later services more than tripled in the second quarter to $4.9 billion.

Jasmine Francis, 29, a tech analyst, said she first used a shop now, pay later service in 2018 to buy clothes from fast-fashion brand Forever21.

“I remember I just had a cart full,” he said. “At first, I thought, ‘Something has to come back,’ and then I saw Afterpay at the checkout: You don’t pay everything now, but you get everything now. That was music to my ears.”

It’s unclear how healthily customers are using buy now, pay later loans. Fitch found that delinquencies on these services rose sharply in the 12 months ending March 31, while credit card delinquencies remained flat. And according to the CFPB, a growing percentage of the loans the industry is making are being written off, or loans it deemed so delinquent they were probably uncollectible. The industry’s cancellation rate was 2.39% in 2021, a figure that is likely to be higher now given this year’s economic downturn. In 2020, that figure was 1.83%.

“This upward trend in delinquencies continues,” Rohit Chopra, director of the CFPB, said in a call with reporters.

Credit reporting company TransUnion found that borrowers who buy now and pay later are using the product as much as credit cards, racking up debt on top of additional debt. A survey by Morning Consult published this week found that 15% of shop-now-pay-later customers use the service for routine purchases such as groceries and gasoline, a type of behavior that sounds alarm bells among financial advisers. The CFPB report also found a small but growing number of Americans who also use these products for routine purchases.

“If these buy-now-pay-later plans are not properly budgeted for, they can have a cascading impact on a person’s entire financial life,” said Andre Jean-Pierre, a former Morgan Stanley wealth advisor who now runs his own planning firm. focused on helping African Americans save and budget properly.

Another concern among consumer advisors and advocates, as well as Washington lawmakers and regulators, is the ease with which consumers can accumulate these installment loans.

Speaking at a Senate Banking Committee hearing on new financial products, Sen. Sherrod Brown, D-Ohio, highlighted the benefits of plans that allow consumers to pay for things in installments. But he also criticized the way the industry promotes the plans.

“The ads encourage consumers to use these plans for multiple purchases, at multiple online stores, racking up debt they can’t pay,” Brown said.

Short-term loans are potentially problematic because they are not reported on a consumer’s credit profile with TransUnion and Experian. In addition to buying now, paying later, customers in the industry are young, which means they have little credit history. Hypothetically, a borrower could take out multiple short-term loans through multiple buy-now-pay-later companies, a practice known as “loan stacking,” and they would never show up on a credit report. If a person puts too many items on Buy Now, Pay Later plans, it could be difficult to budget.

“It’s a blind spot for the industry,” Fitch’s Taiano said.

In a statement, the industry trade group Buy Now Pay Later rejected the characterization that its products could burden borrowers with too much debt.

“With zero to low interest, flexible payment terms, and transparent terms and conditions, BNPL helps consumers manage their cash flow responsibly and live a healthier financial life,” said Penny Lee, executive director of the Association of Financial Technology.

Meanwhile, providers of buy now, pay later services see rising delinquencies as a natural consequence of growth, but also as an indication that inflation is hitting Americans most likely to use these services.

“We’ve seen some stress (among those with the lowest credit scores), and they’re starting to struggle,” said Max Levchin, founder and CEO of Affirm, one of the biggest buy-now-pay-later companies.

“I wouldn’t call it kind of a prelude to a possible recession, but it’s not the same kind of smooth sailing that it has been,” he said, adding that Affirm is taking a more conservative approach to lending.

Buy now, pay later took off in the US after the Great Recession. The product, analysts said, has been largely untested during a long period of financial hardship, unlike mortgages, credit cards or car loans.

Despite these concerns, the consensus is buy now, pay later, companies are here to stay. Affirm, Klarna, Afterpay, which is owned by Block Inc., as well as PayPal and others, are now widely integrated into Internet commerce.

Also, the growth of the industry is attracting more players. Tech titan Apple earlier this summer announced Apple Pay Later, where users can make purchases on a four-payment plan over six weeks.

“I usually plan PayPal ‘Pay in 4’ purchases so that my purchase due dates coincide with my payment dates, since due dates are every two weeks,” said Desiree Moore of 35 years.

Moore said she tries to use Buy Now, Pay Later plans to cover purchases that aren’t in her usual monthly budget, so she doesn’t take money away from her children’s needs. She has been using more and more plans with inflation making items more expensive and so far she is able to keep up with the payments.

Francis, the technical analyst, said it’s now common for her friends to pay for trips with installment loans, so they don’t completely deplete their bank accounts in case of emergencies.

“If I come home from vacation and I have two flat tires, and I just spent all that money on plane tickets, that’s $400 that you don’t have right now,” he said. “Most people don’t have savings. They only have enough for those flat tires.”

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