Buy now, pay later (BNPL) apps and products have quickly entered the consumer lending world and within a few years have become the standard for financing a purchase.
The spending habits of US retailers and consumers have arguably been changed forever as a result of the recent BNPL boom, as shoppers no longer have to use credit or save for a major purchase.
With almost every retailer offering this payment option via an app, store loan or credit card, the question becomes: how much further can this lending model grow and how has it already changed consumer spending trends?
Experts attribute the rapid growth to convenience and lower costs
The growth of buy now, pay later transactions remains steady, with the number of consumers using the tool growing 40 percent in just two years, according to the Federal Reserve Bank of Boston report. Report 2024.
The report also shows that BNPL issuers are often repeat customers.
“Like credit card revolvers, BNPL users tend to repeat their behavior over time: 55 percent of consumers who used BNPL in 2023 had also used it in at least one of the previous two years,” the report said .
Compared to similar loan products, the buy now, pay later option may seem like a no-brainer to many when it comes to financing major purchases. “It’s a very low-cost, usually free way to spread your cash flow,” says Geoff Brown, co-founder and CEO of Highline Technologies.
If you made a $400 purchase with a credit card and didn’t have the payment ready, you would accrue interest. Brown explains that the same scenario with a BNPL loan involves less overall financial risk. “The penalty is that you can’t do any more shopping until you catch up,” he says. “It’s a much gentler consequence…and it’s just less risky from a consumer perspective.”
Younger adults and consumers with debt are more likely to use BNPL plans
According to Bankrate’s Buy Now Pay Later survey, 56 percent of users say they’ve experienced at least one problem while using the service, with Gen Z most likely to say so. More specifically, 34 percent said they spent more than necessary and 28 percent reported having trouble returning or refunding an item.
Chad Willardson, founder and certified financial fiduciary at Pacific Capital, suggests that the rise of BNPL apps and loans among Gen Z and millennials can be attributed to a number of factors, including “ease of use, instant approval, interest-free or low-interest financing and the preference for flexible payment options.”
Learn More: Best Low Interest Personal Loans for August 2024
“The growth of e-commerce, targeted marketing and reduced reliance on traditional credit products are also contributing to the popularity of BNPL services among younger generations,” Willardson added.
Trinity Owen, founder and CEO of The Pay at Home Parent, advises Millenials and Gen Zers to look at their finances holistically before borrowing a BNPL loan. “I have seen firsthand the popularity of buy now, pay later loans among millennials and Gen Z,” she writes.
“It’s easy for young adults to get caught in a cycle of debt that can have long-term consequences. It can negatively impact their credit scores and limit their ability to finance future purchases such as a home or car,” she adds. Rather than relying on financing apps, Owen suggests these age groups focus on building passive income streams and budgeting smartly to achieve financial independence.
“As Millennials and Generation Z navigate the rapidly changing economy, it is more important than ever for them to prioritize financial education and smart decision-making when it comes to their finances,” she concludes.
Frequent use can lead to “overborrowing, financial instability”
With all this attention has come mixed reviews; Some experts argue that the BNPL lending model could represent a positive change for specific U.S. consumers, while others recommend that consumers avoid the products altogether.
As with most forms of consumer lending, there is no black-and-white answer to whether BNPL products are an asset or a liability to the lending community or the general public. It is mainly about how consumers assess the financial risk of using these apps and how they manage their payments.
“While these loans have become increasingly popular among consumers, there is a risk that they could lead to excessive borrowing and financial instability,” said Edward Maslaveckas, founder and CEO of Bud Financial. “They can also offer more flexibility in repayment terms, which can be useful for those with irregular income or unexpected expenses.”
As with credit cards, users need to understand the psychological implications of making purchases with future money. If the money isn’t there or isn’t available right now, it’s critical that consumers understand what adding a new monthly payment could mean for their budget.
Buy now, pay later growth is expected to exceed current consumption
Juniper research estimates that due to macroeconomic factors, buy now, pay later spending globally will grow by 291 percent by 2027. The study predicts the platform will reach a value of $437 billion by 2027, driven by “escalating financial pressure as due to the rising cost of living.”
Experts agree that this trend won’t slow down anytime soon. “I would say it’s definitely something that will continue to grow,” says Brown when asked about BNPL’s pace in the coming years. “It’s just a very efficient tool that people can use, both on the credit side and on the consumer side.”
Brown attributes the recent increase – and future growth – largely to the recent behavior of providers. “This is not brand new. This has been around for decades,” he says, referring to BNPL products. “But the extent to which BNPL providers have been able to reduce their costs… those kinds of discounts really help a lot in expanding access to credit.”
“I don’t see BNPL’s financing slowing down,” said Nelly Rezny, SVP of Business Solutions Group – Americas, Temenos, echoing the thoughts of most experts. “New entrants, from traditional banks to credit card providers, from traditional banks to credit card providers and even more fintech companies, have joined the growing BNPL phenomenon.”
Why consumer spending trends may never look the same
The general attraction to these products and services is indicative of a dramatic, potentially long-lasting shift in consumer behavior. Consumers no longer have to wait weeks or months for an online order; with just the click of a button you can have your online purchase delivered to your home within 1-2 business days.
Learn More: 5 Ways to Avoid Impulse Buying
Modern shopping comfort has made waiting weeks for an online order an archaic concept, effectively changing retail. The same goes for the consumer lending space. Buy now, pay later allows consumers to bypass the ‘savings period’ before a purchase and most apps do not require a lengthy application process as credit cards and personal loans do.
The ease of making a major purchase in four installments without having to walk to a bank is exactly what Gen Z and Millennial shoppers are looking for, says Maslaveckas.
“Our experience is that many younger consumers are looking for alternative lending options that offer more transparency and flexibility than traditional banks. They want to access credit quickly and easily, without having to navigate complex application processes or deal with high fees and interest rates,” he says.
But with BNPL products becoming increasingly popular, Maslaveckas says these loans, if used correctly, can be a valuable tool for these consumers. “Because it’s always good to have more choice as a consumer, as long as there are enough controls to discourage bad actors.”
How borrowers can protect themselves
Consumers need to be more careful than ever when reading terms and conditions, says Sophoan Prak, personal advisor at Vanguard. From misleading disclosures to astronomical interest rates, these products can ultimately do far more harm than good if not paid off in full and on time.
Prak advises that BNPL users fully understand the risks associated with these products before signing on the dotted line. “When consumers make purchases they can’t afford, you have to look at your budget again to figure out if it’s really a good purchase.”
“It [missing payments] can really impact your credit score and financial well-being down the road if something unexpected happens. And from a planning perspective, I think people really need to be prepared for that.” In lieu of potential credit damage, she encourages consumers to read the terms and conditions carefully before accepting the offer, to see if the provider charges interest or reports to credit bureaus.
Rather than jumping straight to financing, Prak echoes the sentiment of many financial professionals and encourages borrowers to take a moment to think about what their budget looks like. “[frequent BNPL usage] can really lead to behavior that’s hard to break out of once you’re in a debt cycle,” she says.
Ultimately, a solid budget and plan are the best way to protect your future financial health. When it comes to an installment loan, that’s not necessarily a bad thing. If you can pay off all installments on time and in full and ensure you don’t borrow too much, this can be an excellent way to build your credit score, should the provider report your repayment history to the credit bureaus. .
