TikTok user @asweetceleste posted a video of an online shopping cart totaling $318, but with Afterpay it would be split into four payments of around $68.
“I lowered the total a bit, but with Afterpay it seems 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 break down the cost of a purchase into a payment schedule paid over a few weeks or months. However, credit experts said that missing a 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 lending services because they typically do not charge interest or have a harsh credit check. According to a survey conducted by LendingTree in April, more than 40% of Americans say they have used a “buy now, pay later” service.
While many people use these loans for small, manageable purchases, credit experts say younger consumers or “invisible creditors” can fall victim to large debt burdens. Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling, said these services appeal to “credit invisibles” because they don’t need good credit to get a line of credit approved.
“Buy, pay later is appealing to shoppers because it makes larger ticketed items more accessible to people who don’t want to pay full price at the checkout, and also to people who may not have access to a traditional line of credit,” McClary said.
Anne Grace Hornstein, 22, said she’s sticking to her budget and not looking for a credit card. Hornstein has used Afterpay three to five times for “major, time-sensitive” purchases like new makeup introductions and governor’s ball tickets without having to deduct from her savings, she said.
“I worked during my summers in college and set up an automatic deposit of $50 a week into my checking account during the semester to spend money,” Hornstein, a recent Syracuse University graduate, said in an Instagram message. “Afterpay has helped me make larger purchases without going over my weekly budget.”
The Consumer Financial Protection Bureau launched a “buy now, pay later credit” investigation last year to “gather information on the risks and benefits of these fast-growing credits,” provided by companies like Affirm, Afterpay, and Klarna . The bureau deals primarily with debt accumulation, data collection and regulatory arbitrage.
A Klarna spokesman said the company supports more regulation of buying now, paying later suppliers to “push” standards and improve consumer outcomes by offering more consumer choice and protection. Klarna’s customer base grew by 60 million consumers between 2020 and 2022, the spokesman said in an email.
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“We are seeing a global shift in consumers increasingly turning away from the greedy practices of traditional banks and expensive credit cards,” the Klarna spokesperson said.
An Affirm spokesman said younger consumers would like “more flexible and transparent” payment options instead of using credit cards. Living solely on direct debit can limit a consumer’s purchasing power, which is why many consumers turned to Affirm to purchase products, the spokesman said.
“We believe that after 2008, consumers, especially Millennials and Gen Z, lost trust in financial institutions and increasingly prefer more flexible and innovative digital payment solutions,” Affirm’s spokesperson said in an email.
More and more companies are now entering the “buy now, pay later” scene. Apple in June announced Apple Pay Later, a “buy now, pay later” service that splits purchases into four equal payments that customers have six weeks to repay without incurring any interest or fees.
Even traditional stores like Macy’s and Target are now signing up for these programs to encourage customers to buy more on their sites. Online stores that offer Afterpay are more likely to spend up to 40% more per order, according to the Afterpay website.
“Offering Afterpay can increase average order value, increase incremental sales and attract new customers,” states Afterpay’s website.
Although there is financial flexibility, some consumers have posted on Facebook groups that they have had issues with services billing them for purchases that were never delivered to them. Teri Blesch, a New Jersey state employee, said she had previously used Afterpay for many purchases, but after the service billed her for a furniture purchase that was never processed, she will stop using it.
“I’ve been going back and forth with Wayfair and Afterpay for almost two months trying to rectify the situation,” Blesch said.
McClary, 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 don’t have overspending checkpoints, making it easier to rack up debt. He said consumers’ credit scores may not improve and may even be adversely affected since most of these services fail to report good behavior to creditors.
Afterpay and Klarna do not report financial information to the credit bureaus, but Affirm may report customers’ late payments to the credit bureaus, which could affect credit scores. These companies may conduct a “soft credit check,” a request that does not affect your credit score when you first use their services.
“You could get into a lot of debt very quickly because there’s 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 through to yours, and within an hour or two you can end up with four, five, six or even a dozen buy now, pay later agreements that you are now committed to paying back.”
AfterPay charges $10 for late payments and $7 for each additional payment. Affirm doesn’t charge late fees, but they can report late payments to the credit bureaus, according to their website.
Annie Millerbernd, a personal loan expert at NerdWallet, said most consumers struggle with managing the loans because they make another purchase now and pay later before paying off their other loans.
Millerbernd suggests consumers create a “buy now, pay later” list of products they want to buy to minimize the risk of overspending. She said it would help consumers take out one loan at once to buy now and pay later rather than taking out multiple loans for multiple purchases.
Consumers used these services more frequently during the pandemic to ease their financial burden by making payment plans for needed products, Millerbernd said. These buy-now, pay-later companies have taken the services “mainstream” by increasing advertising and making their services visible on social media and online shopping sites, she said.
“Buy now, pay later was pre-pandemic and really ramped up during the initial shutdown a few years ago,” Millerbernd said. “People were working from home, they were shopping from home, and it was also an uncertain time for people financially.”
Hornstein, the Syracuse University graduate, said she doesn’t have a credit card, but she likely won’t need to use Afterpay once she does. She said she’d rather save up for a bigger purchase than pay for it over a longer period of time, if she had the money.
“I’ll likely use the service again if it’s a time-sensitive purchase, but otherwise I’d rather save than have a purchase pending,” said Hornstein.
Lauren Sforza is an intern reporting for USA TODAY Network’s How We Live Atlantic Region team. Contact Lauren at email@example.com.