Since the middle of 2021, users of Buy Now, Pay Later (BNPL) apps have been falling behind on payments for their purchases. That’s obviously not good for consumers, but it is also taking a toll on the companies that are making these short-term loans.
The Wall Street Journal reports that BNPL companies like Affirm, Afterpay, and Zip are having to adjust because of missed payments and rising interest costs.
“We are putting a real focus on sustainable growth, strong unit economics and, critically, accelerating our pathway to profitability,” Zip co-founder Peter Gray told the Journal.
Alternative to credit cards
BNPL was all the rage at the beginning of the pandemic. The system allows consumers to make a purchase with a down payment and then two or three more equal payments every two weeks to complete the purchase.
Many consumers prefer the system because they aren’t adding to high-interest credit card balances that never seem to get paid off. But sometime in 2021, BNPL companies started sending out late payment notices.
In September, Credit Karma released research showing that 44% of Americans had used a BNPL plan. Of those consumers, 34% said they have fallen behind on payments.
Those missed payments have had significant consequences for consumers. Of those who admitted to having missed at least one payment, 72% said they believe their credit score declined as a result. Nearly a third said they experienced “significant” declines in their credit score.
Annie Millerbernd, one of Nerdwallet’s financial experts, says many consumers are under the mistaken belief that they’re getting a deal. Actually, it’s just a different financing plan.
“You only have to pay for a quarter of the price tag at checkout, but the actual cost isn’t lowered at all,” Millerbernd told ConsumerAffairs. "More payments will follow, usually in two-week increments, and not having a plan to make those payments can get you off track.”
That appears to be what’s happening. If a consumer goes shopping and makes three BNPL purchases, they may be able to handle the three initial down payments. However, they will be on the hook for additional payments over the next six weeks.
Claudia Valladares, a financial advisor at Kovar Wealth Management, says BNPL plays on consumers’ appetite for instant gratification. If not properly managed, it can have the same result as running up credit card debt.
“The consumer doesn't realize those ‘small’ monthly payments can quickly throw off their monthly budget,” Valladares told us. "[Spending] $50 here, $35 there will add up! But as I mentioned, our generation wants things now so we don't think through the financial consequences at the time of the purchase.”
Millerbernd advises consumers to know their budget before making a BNPL purchase and to stick to it. Valladares says consumers should probably wait until they can pay the cost of the item entirely before making the purchase.
In March, a coalition of 77 consumer groups asked the Consumer Financial Protection Bureau to provide oversight and regulation of these financial products. The letter warned that BNPL is contributing to an explosion in consumer debt.
“BNPL products have largely evaded oversight by federal and state regulators,” the groups stated. “Although these products could have a place in meeting consumer needs if they operate as promised, they pose a risk to consumers and should be covered by basic consumer protections.”