But now that January is here and the other installments start, Anderson doesn't know how he's going to pay them. He wondered how he was going to cover his bills and found himself buried under micropayments.
“I'm definitely selling clothes … if I have to sell a pair of shoes to pay off, I will,” Anderson told CNBC about the roughly $1,700 she bought and then paid off the loan. “I'm definitely worried [the payments]. It's definitely a concern and I definitely have to find a way to bring in the money.”
Anderson is one of many Americans who turned to Buy Now to finance their holiday shopping last year to avoid credit card debt, but are now having trouble paying those bills.
In an era where persistent inflation and record-high interest rates are shaping financial decisions for many shoppers, the service helped fuel a boom in overall online spending that hit $222 billion from Nov. 1 through the end of December. During the season, buy-now-pay-later was at an all-time high, up 14% from the previous year, contributing $16.6 billion to online spending.
On Cyber Monday alone, Adobe reported that buy-now-pay-later usage increased by nearly 43%.
“Sales, particularly online sales, have probably been juiced to some extent because of the buy-now, pay-later trend,” said Ted Roseman, senior analyst at Bankrate. “A lot of people are attracted to this financing method as an alternative to a credit card with an average interest rate of 20.74%. I warn you that buying now and paying later can get you into trouble. You can still encourage yourself to overspend and cheat yourself.”
Credit card debt has soared to a record high and lending rates have nearly doubled in the past two years, fueling a surge in the use of buy-and-pay-later. During the Covid-19 pandemic, when delinquencies were at historic lows, the proportion of people who went more than 30 days unpaid on their credit card bills It recently topped pre-pandemic levelsAccording to the Federal Reserve.
It's hard to say how buying now, paying later fits into the country's overall debt picture. Service providers typically don't disclose how often those bills go unpaid, and the loans aren't reported to the credit bureaus. Klarna, PayPal and Affirm have all declined to pay buy-now-later delinquency charges with CNBC.
Affirm says the short-term and fast nature of buy-now, pay-later services makes traditional credit metrics less relevant. It writes off loans that are unpaid within 120 days, which is why it doesn't release delinquency rates for the service. It discloses other credit metrics for its long-term loans.
Klarna and Affirm previously told CNBC that their underwriting strategies ensure that only short-term borrowers can access the service because their business models don't work if people fail to pay frequently. Klarna charges late fees of up to 25% of the purchase price, 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 repay the company early, it said.
The opacity surrounding the novel service has created the so-called phantom credit phenomenon, which has economists, regulators and even shoppers worried about the effect it could have on the economy.
“It's a really bad debt cloud. No one really knows how it works, it's just floating around us all the time, and it certainly feels like the pending housing crisis of 2008, but for shopping,” Anderson joked. “The myth that Klarna and PayPal sell you is that you can have this lifestyle, these things, but the truth is, you can't.”
Alaina Finkel, a New Orleans-based financial coach and founder of The Organized Money, gets five or six emails in early January from holiday overspenders and people who need help managing their finances.
This year, it was closer to 20 or 25.
“Most people use their money, they don't have money, and then they put it on a credit card, and then if they max out their credit cards, they go to other services like buy now, pay later,” Finkel said. CNBC.
Finkel said he spoke with a customer who had two maxed-out credit cards and was struggling to make the payments, buying two now and paying for services later.
“Since she couldn't afford it in the first place, she's struggling to make those minimum payments cover food for the month and her regular bills,” Finkel said. “So it creates this cycle where it comes out harder and harder.”
While it's not clear how often buy-nows go unpaid, those who use them are twice as likely to default on another credit product, such as a car loan, personal loan or mortgage, according to a 2023 study. Consumer Financial Protection Bureau. According to the CFPB, people who use the service have higher balances and lower credit scores than other credit products.
As more shoppers use the product, consumers are torn about how they feel about it. In the weeks after Christmas, people on social media platform X, formerly known as Twitter, said they were grateful to buy now, pay later, and couldn't buy holiday gifts without it.
Others called it “dangerous” and vowed to stop using it as a New Year's resolution. At least one shopper said they want to use their rent money to buy things now and pay bills later.
“Buy now, pay later is a beast. It certainly is. But you have to be a big beast.” Hensley Resier, a loyal Klarna user, said some shoppers were responding to difficulties with the service.
In an interview with CNBC, the 34-year-old refugee advocate from Jersey City, New Jersey, Klarna helped give her family a “wonderful” Christmas. But when she first started using Buy Now, Pay Later during the Covid-19 pandemic, she had trouble keeping track of payments and found herself getting hundreds of dollars overpaid and getting crushed by fees.
“When I realized I could still get what I wanted, like with designer goods, without having to pay the entire purchase on the spot, I lost my mind. … It was like a kid in a candy store,” Resier recalls. “Let's say Klarna gives me $1,000. In my head, I'm like, 'Oh my god, this is free money.'
Resier was in a cycle where he had to wait to get paid to cover his overdraft fees. These days, she has a system in place to manage payments so they don't interfere with her other bills.
“Even though I'm in my career now and definitely making more money, being able to split my payments and not worry about bills, I'm definitely, definitely all for it,” Resier said. “It splits the payments, so I don't feel it. Yes, I'm paying the same amount, but because it's spread out, it doesn't hurt as much.”
Branica Bright, a mother of three who lives in Birmingham, Alabama and works in higher education, told CNBC that she used Afterpay, the Black Buy Now, Pay Later service, this Christmas to buy her kids an icemaker, PlayStation 5 and Drake concert tickets. . He uses different providers depending on what the retailer offers. Pride said the service came in handy this Christmas as she waited until the last minute to start shopping and was reluctant to put down the full cost of a purchase in one go.
“I've used it in the past and not as heavily as I did this time,” he said, adding that he now adds up to about $1,300 in purchases to pay off the loan over the holidays. “I don't really get into the holiday spirit until Christmas week. So it's funny when I'm doing all the shopping and I'm like, 'Oh, I'm going to regret it for two weeks.'”
Pride says she buys now, pays later, and generally has never had a problem using the service on payday, so she knows she'll have money before her next installment. She appreciates the flexibility it gives her, but admits it can encourage overspending or get in the way of her bigger financial goals. Without it, she wouldn't buy as many favorite things as she does.
“Every year I say I don't want to take it on in the new year,” Bright said. “But somehow, it always comes with me.”
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