Buy now, pay later loans are extremely popular, especially among Millennials and Gen Zers, because the loans give them more purchasing power, and they can spread out the payments, usually without having to pay interest.
Yet, despite the immense popularity of BNPL loans, evidence is emerging that consumers with multiple such loans open at any time are likely to miss a payment. A survey this month of some 1,500 BNPL users by Breeze, a provider of disability insurance that follows personal-finance trends, revealed that 48% of users with multiple BNPL accounts open have missed a payment. Concerns over the rate of BNPL delinquencies began to emerge in 2021.
“That nearly half of BNPL users with multiple accounts have missed a payment is surprising, considering the average ticket is not all that high and no interest is charged,” says Mike Brown, director of communications for Breeze, the trade name for Hoboken, N.J.-based Modern Insurance Agency Inc.
Overall, 36% of respondents say they have missed a BNPL payment at least once, a figure that Brown also found on the high side. One culprit for the delinquency rate could be that BNPL lenders tend not to perform extensive credit checks, if any at all, when qualifying applicants, observers say. As a result, BNPL lenders may have opened the door to qualifying consumers with poor credit ratings who may be overextending themselves with too many BNPL accounts.
While 41% of BNPL users said they have had multiple BNPL accounts open at one time, 57% of BNPL users said BNPL has caused them to spend above their means. A tendency to overspend with BNPL has a direct correlation to missed payments, according to the study.
“When a consumer has multiple BNPL accounts open, even though the payment for each account may be manageable by itself, paying on multiple accounts at once can snowball on a consumer and lead to missed payments,” says Brown. “This is something to keep an eye on going forward.”
Signs that credit overreach is emerging in the BNPL space is likely to bring increased scrutiny from regulators, Brown says. Last month, the Consumer Financial Protection Bureau issued a letter to five BNPL lenders demanding data about their respective operations. Shortly afterward, Equifax Inc. announced it would become the first credit bureau to add BNPL data to consumer credit reports, a move that is expected to help BNPL lenders manage their risk better.
“Recent reports have suggested Capitol Hill, the credit companies, and the CFPB will all start looking at the BNPL industry with more scrutiny,” says Brown. “Most BNPL companies right now are not really looking intently at credit usage or history during the application process and it’s possibly leading to BNPL distributing too much unwarranted credit.”
A primary reason consumers apply for BNPL loans is that many have poor credit histories. Of the BNPL users surveyed, 45% said they started using BNPL because of a bad credit rating. As a result, the popularity of BNPL loans is starting to rival that of credit cards. Indeed, 63% of BNPL users believe BNPL is a better product for financing purchases compared to a credit card and 61% say BNPL has reduced their credit card usage.
“BNPL is becoming a competitive threat to credit cards, especially among Millennials and Gen Zers, because they don’t like the idea of paying off high-interest-rate credit card debt,” Brown says. “BNPL also is a way for people to make purchases without depleting their savings and is one of the trendiest personal finance products at the moment.”