But now that January has arrived and the other installments begin, Andersen isn't sure how she'll pay them off. She is buried under a mountain of small payments and wonders how she will pay her bills.
“I've definitely sold clothes…if I have to sell a pair of shoes to cover the money, I will do that,” Andersen told CNBC of the roughly $1,700 she made with Buy Now, Pay Later “-has accumulated debts. “I'm definitely worried [the payments]. It’s definitely a cause for concern and I definitely need to find a way to get the money.”
Andersen is one of many Americans who used buy now, pay later to finance their holiday shopping last year to avoid credit card debt, but are now struggling to pay off those bills.
At a time when persistent inflation and record-high interest rates are influencing financial decisions for many shoppers, the service helped fuel a boom in overall online spending that peaked at $222 billion from November 1 through the end of December reached. During the season, buy now, pay later usage reached an all-time high, increasing an incredible 14% year over year and contributing $16.6 billion to online spending.
On Cyber Monday alone, buy now, pay later usage increased nearly 43%, Adobe said.
“Sales, particularly online sales, have likely declined to some extent due to the use of buy now, pay later,” said Ted Rossman, senior analyst at Bankrate. “Many people are drawn to this financing method as an alternative to something like a credit card, where the average interest rate is a record high of 20.74%. I would like to point out that you can still get into trouble with “Buy now, pay later…” can still encourage you to overspend and trick yourself.
The rise in buy now, pay later usage comes as credit card debt is at record highs and delinquency rates have nearly doubled in the last two years. While delinquencies hit historic lows during the Covid-19 pandemic, the number of people who haven't paid their credit card bills for more than 30 days recently reached pre-pandemic levels, according to the Federal Reserve.
It's hard to say how the buy now, pay later principle fits into the bigger picture of the country's debt. Providers offering this service typically do not disclose how often these bills go unpaid, and the debt is not reported to the credit bureaus. Klarna, PayPal and Affirm all declined to share “buy now, pay later” late payment rates with CNBC.
Affirm has said that the short-term nature and speed of its buy now, pay later service makes traditional credit metrics less relevant. These unpaid loans are written off within 120 days, which is why default rates for the service are not disclosed. Further credit metrics for its longer-term loans are disclosed.
Klarna and Affirm previously told CNBC that their underwriting strategies ensure that only people who can repay the short-term loans can access the service, as their business models would not work if people frequently miss payments. While Klarna charges late payment interest of up to 25% of the purchase price, Affirm does not, according to a review of its terms and conditions.
Klarna said the global default rate for its entire business, including buy now, pay later, is less than 1%. In the US, 35% of consumers paid the company back early, it said.
The opacity surrounding the novel service has created a so-called phantom debt phenomenon that has economists, regulators and even consumers worried about its potential impact on the economy.
“It’s just this nebulous cloud of debt. Nobody really knows how it works and it's always hovering around us and it definitely feels like a looming housing crisis, almost like 2008, just for shopping,” Andersen joked. “That’s the myth that Klarna and PayPal are selling you, that you can have this lifestyle, that you can have these things, but the truth is you can’t.”
Alaina Fingal, a New Orleans-based financial coach and founder of The Organized Money, typically receives five or six emails in early January from people who overspent during the holidays and need help managing their finances.
This year there were more like 20 or 25.
“Most people used up all their cash, then ran out of cash, then put it on a credit card, and then when they maxed out their credit card, they went to other services like buy now, pay later,” he said Fingal CNBC.
Fingal said she spoke to a customer who had two fully paid-up credit cards and was using two buy now, pay later services, so she was having difficulty making payments.
“Because she couldn’t afford it in the first place, these minimum payments are having a hard time covering her groceries and her regular bills for this month,” Fingal said. “So it just creates this cycle that it becomes more and more difficult to get out of.”
While it's unclear how often Buy Now Pay Later bills go unpaid, people who use them are more likely to default on another credit product, such as a car loan, personal loan or mortgage, a study finds the Consumer Financial Protection Bureau in 2023. People who use the service also tend to have higher balances on other loan products and lower credit scores, according to the CFPB.
As more buyers use the products, consumers are torn about what they think about them. In the weeks after Christmas, some said on the social media platform
Others called it “dangerous” and vowed to stop using it as a New Year’s resolution. At least one buyer said he had to use his rental money to pay his buy now, pay later bill.
“Buy now, pay later is a beast. It definitely is. But you have to be the bigger beast.” said Hensley Resiere, a loyal Klarna user, in response to the difficulties some shoppers are having with the service.
In an interview with CNBC, the 34-year-old refugee worker from Jersey City, New Jersey, said: said Klarna helped her give her family a “fantastic” Christmas. But when she first started using Buy Now, Pay Later during the Covid-19 pandemic, she struggled to keep track of payments and was overdrawn hundreds of dollars and hit with fees.
“When I realized I could still get what I wanted, like designer items, and not have to pay the full purchase price on the spot, I lost my mind. … It was like being a kid in a candy store,” Resiere remembers. “Let’s say Klarna gave me $1,000. In my head I was like, 'Oh my God, this is free money.' So I spend the whole thousand and forget that I have rent, car registration, car insurance, all these bills, groceries, everything.”
Resiere found herself in a cycle of waiting for her overdraft fees to be paid. Nowadays, she has a system in place to manage payments so that they don't affect her other bills.
“Even though I'm in my career now and obviously making more money, I'm definitely for any way to split my payments and not worry about bills,” Resiere said. “It splits the payments so I don’t really feel it. Yes, I pay the same amount, but the fact that it is distributed doesn’t hurt as much.”
Branika Pride, a mother of three who lives in Birmingham, Alabama, and works in higher education, told CNBC that this Christmas she used Afterpay, Block's buy now, pay later service, to get her children an ice maker , a PlayStation 5 and Drake concert tickets to buy. She uses different providers depending on what the retailer offers. Pride said the service came in handy this Christmas because she waited until the last minute to shop and wasn't prepared to pay the full cost of the purchases all at once.
“I've used it in the past, but not as much as this time,” she said, adding that she accumulated about $1,300 in debt over the holidays that she could buy now and pay off later. “It wasn’t until Christmas week that I really got into the holiday spirit. At the end, when I did all the shopping, it was just kind of funny and I thought, 'Oh, I'm going to regret this.' two weeks.'”
Pride said she's never had a problem financing her instant purchase, paying later, and typically uses the service around payday so she knows she'll have the money when the next installment comes around. She appreciates the flexibility it offers her, but acknowledges that it can cause her to overspend or get in the way of her larger financial goals. Without them, she probably wouldn't buy as many necessities as she does.
“Every year I say I don’t want to carry it into the new year,” Pride said. “But somehow it always stays with me.”
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