Buy now, pay later? One missed payment could mean costly debt, with young shoppers at risk

TikTok user @asweetceleste posted a video of an online shopping cart that totaled $318, but with Afterpay it would be split up into four payments of about $68.

“I got the total down some, but with Afterpay, it makes it seem so much more reasonable,” the caption reads. “Should I do it?”

“Buy now, pay later” services like Afterpay, Affirm and Klarna are instant point-of-sale loans that divide the cost of a purchase into a payment plan, paid over a few weeks or months. But credit experts said that missing one payment can send the consumer into a spiral of debt riddled with late fees and increased interest rates.

These point-of-sale loans are often advertised as safe and accessible alternatives to credit cards and other loan services because they typically do not charge interest or conduct a hard credit score check. More than 40% of Americans said they have used a “buy now, pay later” service, according to a survey conducted by LendingTree in April.

While many people use these loans for small, manageable purchases, loan experts said younger consumers, or “invisible creditors,” can fall prey to large amounts of debt. Bruce McClary, the senior vice president of communications at the National Foundation for Credit Counseling, said these services appeal to “credit invisibles” because they do not need a good credit score to get approved for a line of credit.

“The lure of buy now, pay later for shoppers is that it does make larger ticket items more accessible for people who don’t want to pay the full price at checkout and also for people who may not have access to a traditional line of credit,” McClary said.

Anne Grace Hornstein, 22, said she sticks to her budget and is not in the market for a credit card. Hornstein has used Afterpay three to five times for “larger, time sensitive” purchases, like new makeup launches and Governors’ Ball tickets, without needing to withdraw from her savings, she said.

“I worked during my summers in college and during the semester would set up an automatic transfer to my checking account of $50 per week for spending money,” Hornstein, a recent graduate of Syracuse University, said in an Instagram message. “Afterpay helped me make larger purchases without exceeding my weekly budget.”

The Consumer Financial Protection Bureau opened up an inquiry last year into buy now, pay later credit to “collect information on the risks and benefits of these fast-growing loans” provided by companies including Affirm, Afterpay and Klarna. The bureau is mainly concerned with accumulating debt, data harvesting and regulatory arbitrage.

A Klarna spokesperson said the company supports more regulation of buy now, pay later providers to “drive up” standards and improve consumer outcomes by offering more choices and protections for the consumer. Klarna’s consumer base increased by 60 million consumers between 2020 and 2022, the spokesperson said in an email.

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“We are seeing a global shift in consumers increasingly turning away from greed-fueled practices of traditional banks and high cost credit cards,” the Klarna spokesperson said.

An Affirm spokesperson said younger consumers want more "flexible and transparent" payment options instead of using credit cards. Living on debit alone can limit a consumer's purchasing power, which is why many consumers turned to Affirm to buy products, the spokesperson said.

"We believe that consumers, especially Millennials and Gen Z, have lost trust in financial institutions post-2008 and increasingly prefer more flexible and innovative digital payment solutions," the Affirm spokesperson said in an email.

More companies are now entering the buy now, pay later scene. Apple announced in June it will launch Apple Pay Later, a buy now, pay later service that will split purchases into four equal payments that customers will have six weeks to pay off, without tacking on interest or fees.

Traditional stores too, like Macy’s and Target, are now enrolling in these programs to encourage customers to purchase more from their websites. Online shops that offer Afterpay are more likely to have customers spend up to 40% more per order, according to Afterpay’s website.

“Offering Afterpay can drive up average order value, increase incremental sales and attract new customers,” Afterpay’s website states.

Although there is financial flexibility, some consumers have posted on Facebook groups that they have had issues with services charging them for purchases that were never delivered to them. Teri Blesch, a New Jersey state employee, said she used Afterpay for many purchases before, but after the service charged her for a furniture purchase that was never processed, she will not be using it again.

“I have been going back and forth with Wayfair and Afterpay for nearly two months trying to rectify the situation,” Blesch said.

McClary, the senior vice president of communications at the National Foundation for Credit Counseling, said the “biggest risk” is mismanaging the amount of debt because it’s easy to use services like Afterpay for multiple purchases. Many of these services do not have checkpoints for overspending, making it easier to rack up debt. He said that because most of these services don’t report good behavior to the creditors, consumers’ credit scores won’t improve and could even be negatively impacted.

Afterpay and Klarna do not report any financial information to the credit bureaus, but Affirm may report customers’ late payments to the bureaus, which could lower credit scores. These companies may perform a “soft credit check,” an inquiry that does not affect your credit score, when using their services for the first time.

"You could rack up a lot of debt really quickly because there is a very low barrier to entry with these buy now, pay later arrangements,” McClary said. “You don’t have to go through a credit check. You just click your way through, and in the course of an hour or two, you can end up with four, five, six, or even a dozen buy now, pay later arrangements that you are now committed to repay.”

AfterPay charges $10 for any late payments, with $7 for every following payment. Affirm does not charge any late fees, but they may report late payments to the credit bureaus, according to their website.

Annie Millerbernd, a private loans expert at NerdWallet, said most consumers struggle with managing the loans because they use another buy now, pay later service before paying off their other loans.

Millerbernd suggests consumers create a list of products they want to purchase with buy now, pay later services to minimize the risk of overspending. She said taking out one buy now, pay later loan at a time will help consumers manage it easier than taking out multiple loans for multiple purchases.

Consumers used these services more during the pandemic to lighten their financial load by setting up payment plans for products they needed, Millerbernd said. These buy now, pay later companies made the services “mainstream” by boosting advertising and making their services seen on social media and online shopping sites, she said.

“Buy now, pay later existed before the pandemic and really ramped up during the initial shutdown a couple of years ago,” Millerbernd said. “People were working from home, they were shopping from home, and it was also an uncertain time financially for people.”

Hornstein, the Syracuse University graduate, said she does not have a credit card, but she likely would not need to use Afterpay once she has one. She said she would prefer to save up for a larger purchase rather than having to pay for it over a longer time if she had the money to do so.

“I am likely to use the service again if it was a time-sensitive purchase, but otherwise I prefer to save up rather than having a purchase loom over me,” Hornstein said.

Lauren Sforza is an intern reporting for the USA TODAY Network's Atlantic Region How We Live team. Contact Lauren at lsforza@northjersey.com.

This article originally appeared on NorthJersey.com: Pay over time loans may raise risk of long-term debt for young people