Should you open a Buy Now, Pay Later account this holiday season?

Photo (c) Guido Mieth - Getty Images

There are signs that consumers who have are getting over-extended

With Black Friday fast approaching many consumers may be considering opening buy now, pay later (BNPL) accounts to help finance holiday purchases. But after two years of rapid growth in the financial services industry, some caution lights are flashing.

Earlier this year J.D. Power issued a report that found people using what should be an efficient way to make a big ticket purchase are running into trouble. Theoretically, BNPL services should be a no-brainer.

A consumer makes a purchase but only puts down 25% of the price. Two weeks later they pay another 25% with equal payments following every two weeks until the purchase is paid for. In many cases, there are no fees or interest.

If you make just one BNPL purchase, the loan should be very manageable. But if you have a dozen such loans at once, that’s where consumers are running into trouble.

J.D. Power found that a growing number of borrowers are opening multiple BNPL accounts and don’t repay the loans on time, resulting in interest and fees. The report found young consumers are especially vulnerable.

“They tend to have more accounts and are more likely to be paying off multiple purchases at once,” the authors wrote. “However, many are also failing to take advantage of interest-free options and instead paying beyond their budgets and not paying on time.”

Close scrutiny from regulators

The rapid growth of BNPL has gotten the attention of financial regulators. In a recent report, the Consumer Financial Protection Bureau (CFPB) found that late fees are becoming more common – that 10.5% of unique users were charged at least one late fee in 2021, up from 7.8% in 2020.

Of special concern, the CFPB said borrowers may encounter products that do not offer protections that are standard elsewhere in the consumer financial marketplace. 

“These include a lack of standardized cost-of-credit disclosures, minimal dispute resolution rights, a forced opt-in to autopay, and companies that assess multiple late fees on the same missed payment,” the report said.

Tighter lending standards

As late fees mount, BNPL lenders appear to be tightening lending guidelines. Some consumers who have used BNPL accounts in the past have reported being declined when they applied in 2022.

Erica Seppala, a financial analyst at, says most BNPL firms have their own set of requirements.

“At any time, a user can be reevaluated to determine if he or she still meets these requirements,” Seppala told ConsumerAffairs. “For some consumers, this may lead to an increased credit limit. For others, a reduced credit limit or even an outright denial of credit is possible if the requirements are no longer met.”

While BNPL may be an improvement over payday loans, some in the financial services industry think consumers would be better served by having an even longer payback period. Marc Werner, co-founder and CEO of GhostBed, said he found a way to do just that.

“Luckily, I was able to secure an industry-leading financing plan with Affirm,” he told us. “That allows us to offer three to five years for as low as 0% APR. While our competitors are only offering financing from 12 to 18 months with a lower approval rate.”

Putting holiday purchases on a credit card allows for an open-ended payback period but that carries extremely high credit card interest rates, presenting its own set of costly problems. 

A less costly option is a personal loan. It provides a long payback period and its interest rate is about half of what credit card lenders charge.

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