Buy now, pay later is more dangerous than ever

What could go wrong when Black Friday shopping meets an affordability crisis?

The other day, I went to buy my first big Christmas gift of the year, and there it was, on the checkout page: Would I like to split this purchase up into four easy interest-free payments?

Parting with a smaller amount of money to get something you want sooner is a compelling offer. So compelling that half of all shoppers in the United States plan to use so-called “buy now, pay later,” or BNPL, services for holiday shopping this year, according to a PayPal survey. The same survey showed that one in four millennials and Gen Z-ers use payment options like Affirm and Klarna on a regular basis. These are the same young people who are having a hard time finding a job, struggling to pay overdue student loan bills, and dealing with rising food prices. That might be why it felt so dark when DoorDash announced a partnership with Klarna earlier this year, ushering in an era where people are taking out loans to pay for their takeout.

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As affordability becomes the dominant issue in American politics, the holiday shopping season feels different this year. Everything is more expensive, sure. But with BNPL options being offered by everyone from fintech startups to major banks, it’s also easier than ever to finance purchases you couldn’t otherwise afford. Meanwhile, the Trump administration has taken some of the guardrails off this shadowy lending industry, leaving consumers more vulnerable to unexpected fees and endless debt. Some are even warning that the precarious situation is starting to look a lot like the early days of the subprime mortgage crisis that led to the Great Recession.

“BNPL lenders are not currently required to [...] determine whether consumers can afford their BNPL loans,” said Nadine Chabrier, senior policy and litigation counsel at the Center for Responsible Lending. “There are currently no checks and balances on borrowers taking out multiple BNPL loans at the same time, which may lead to overextension.”

If you’ve seen The Big Short or simply followed along as history unfolded, this sounds pretty concerning. Before I get too carried away with warning of an imminent economic crisis, however, let’s review how these little loans work.

In the industry’s early days, you were mostly likely to come across a BNPL option on the checkout page of an e-commerce website, probably one selling luxury goods. The option to pay in installments, often with zero interest, made it easier for consumers to pull the trigger on high-dollar items, so stores were quick to adopt the feature. The lenders would make their money by taking a small cut of the purchase price, and they would also charge the consumer fees for late payments.

Venture-backed fintech startups led the charge. Affirm, founded in 2012, helped take BNPL mainstream and Klarna joined the market in 2015. The pandemic supercharged the industry, and the dollar amount borrowed skyrocketed from $16.8 million in 2019 to $180 million in 2022, according to a Consumer Financial Protection Bureau (CFPB) report released that year. The average loan at the time was $135.

One big problem, as Chabrier pointed out, is that BNPL lenders typically don’t have to check to see if you can afford to take out a loan, and it’s possible to take out several at once, a practice known as “loan stacking.” These factors might explain why late payments are so common. More than 40 percent of BNPL users say they made a late payment in the last year, up from 34 percent last year, according to a Lending Tree survey. Meanwhile, more than 20 percent say they’ve had three or more loans going at once, and a quarter of people surveyed said they’ve taken out a BNPL loan to buy groceries.