Buy now, pay later services have exploded in popularity over the past few years and were originally touted as a way to ease debt burdens. But mounting research shows BNPL could actually be making your debt worse, not better.
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BNPL Can Lead to Debt Stacking
With BNPL, you’re probably not replacing one debt for another; you may just be accumulating both. Data from the Consumer Financial Protection Bureau showed that in 2022, 63% of BNPL borrowers took out multiple simultaneous BNPL loans — and 33% took out loans from multiple BNPL lenders.
These BNPL borrowers were also more likely to hold higher balances on other credit accounts, including personal loans, retail loans, student loans, credit cards and subprime alternative financial services lenders. Which isn’t surprising when you consider that nearly two-thirds of BNPL loans went to borrowers with subprime (580 to 619) or deep subprime (below 580) credit scores.
Let’s say you finance a furniture purchase through a BNPL provider, but you also use your rewards credit card to purchase groceries and gas. This means you’re officially debt stacking, which is accumulating multiple forms of debt simultaneously. When you have multiple small debts like this, it can be hard to track them accurately.
Plus, compared with consumers with a similar financial profile who did not use BNPL services, consumers who took out at least one BNPL loan in a given month were more likely to hold higher balances on other types of unsecured consumer credit. How much more?
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BNPL Can Slow Credit Card Debt Repayments
Most of us live on a fixed income. After covering mortgage or rent, gas, food, utilities and other essentials, there’s only so much left for savings and debt repayment. And every dollar you give to a BNPL plan can’t be used to reduce your credit card balance. If a BNPL payment prevents you from making substantial progress on a credit card balance, you could end up paying hundreds more in high interest.
Let’s say you have $500 available each month to put toward debt. And you have a balance of $6,000 on a credit card with an interest rate of 21%. But you also have a BNPL plan that requires $200 monthly payments. It would take you over two years to pay off that credit card if you made monthly payments of $300. And you’d pay close to $1,500 in interest.
But if you made monthly payments of $500 to that $6,000 credit card balance, it would take you 14 months to pay off that balance, and you’d pay a little under $800 in interest — a difference of about $650.
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Warning Signs BNPL May Be Harming Your Finances
BNPL isn’t automatically problematic. If used correctly, it can be helpful in a pinch. But there are certain warning signs that could indicate these services are doing more harm than good to your finances.
— You have multiple active payment plans. If you’re juggling multiple BNPL plans, it may be time to review how much you’re spending each month and determine where you can pull back.
— You’re making minimum payments on your credit cards. Making only the minimum payment is a recipe for disaster because you’ll get charged all that interest. It’s OK to make just the minimum payment once or twice, but if it’s the only amount you can consistently afford to pay, then your budget is stretched too thin and needs adjusting.
— You’re using BNPL for everyday expenses. Using BNPL for essentials is a warning siren, since these services are generally designed for planned purchases, not routine living expenses.
Consumers can benefit from BNPL services when the purchase is planned and necessary, a clear repayment strategy is achievable and it doesn’t mean a credit card will accrue undue interest. If you already have significant credit card debt, a BNPL plan could just make things worse.
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BNPL Might Be Making Your Credit Card Debt Worse originally appeared on usnews.com
