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The risks in buy now, pay later holiday purchases: Credit experts


Chicago Black Friday shoppers fill Target Stores.

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“Buy now, pay later” has become a popular payment tool among young consumers, replacing standard bank credit cards. And this year, the largest retailers are adapting to the trendy payment option for the holiday shopping season. But it comes with a warning: defaults on “BNPL” payments have been rising and experts worry BNPL can be a recipe for overspending.   

More than 50% of consumers intend to use BNPL within the next 12 months, which is good news for merchants. Shoppers are more likely to spend more per purchase when they use BNPL, according to McKinsey.  

You can use the spending option for large or small purchases.

September AmazonWe reached a settlement with Affirm that would allow consumers to split purchases of $50 or more into smaller monthly payments, a trend that Dan Dolev, Mizuho analyst, told CNBC’s “TechCheck” is growing. “The big trends we are looking at is the move toward lower ticket items,” Dolev said. We are already seeing this in Affirm’s Amazon deal.”  

Everyday spending items, like a pair of shoes, is a BNPL space retailers want to accommodate, according to Dolev, because of the frequency and low risk of the purchases. “You aren’t going to go bankrupt on a pair of shoes.” 

Fintechs Square, Paypal and others recently bought in to the BNPL market.

Macy’s, Amazon and Walmart are among the biggest retailers that have begun offering “buy now, pay later” payment options. This October, Target announced it would adapt to BNPL ahead of the holiday shopping season to make shopping “more flexible and personalized to guests’ needs, right in time for the holiday season,” the company said in a statement. 

Target said its partnership with BNPL firms Sezzle and Affirm will let consumers pay at a pace that best suits them. The company stated that it was a convenient option for holiday shoppers and throughout the year.  

Sezzle will break each small purchase, like festive party supplies or holiday PJs, into four interest-free payments over six weeks. Affirm’s longer payment terms allow customers to get rid of expensive items, such as furniture and electronics. 

Holiday retail sales have inclined steadily over the last decade. Holiday retail spending reached $400 billion in 2000. Comparably, and despite being in the peak of a global pandemic, 2020 holiday sales reached near-$800 billion, according to the National Retail Federation, which is predicting the sales will set a new record againThis is the year.

In 2021, consumer spending is up, the economy is reopening, and consumers are ready to shop for the holidays.  

1 in 3 Americans expect to take on debt this holiday shopping season, according to an October Credit Karma survey. But no matter how people plan to purchase their holiday items, consumers should be mindful of their spending, and any interest or late fees that may be part of credit card or BNPL models. 

It booming financial tool offers consumers installment options on instant purchases.

A spokesperson for Affirm said that regardless of whether the transaction is made with a BNPL or credit card, consumers must fully comprehend the process. 

“People tend to lose their minds financially speaking, right around Black Friday,” said John Ulzheimer, a credit expert. “So, when you combine a higher delinquency rate with more debt, which is what happens at the end of the year, because of holiday shopping activities, you are combining two things that are pretty dangerous.” 

BNPL draws consumers in with its zero-interest financing, but to guarantee no interest and no fees, consumers must meet certain termsYou can make timely and complete payments. 

Klarna, which is a Fintech company from Sweden, charges retailers for BNPL. But if a scheduled payment is past-due, a late fee of up to $7 — capped at a maximum of 25% of the past-due amount — is issued to the consumer.  

Have you heard of Affirm? no late feesAlthough it does charge interest, customers are charged only interest for what they purchase. However, they only get approved for the amount that they have chosen to purchase. The customer can decide to repay the loan over time. Affirm warns that late payments could affect the consumer’s eligibility for future loans.  

In a Credit Karma survey released in September, 44% of respondents said they had used BNPL services, and 34% had fallen behind on one or more of those payments. Further, more than half of the young consumers included in the survey said they have missed at least one BNPL payment: “25% of millennials have missed one payment, while 30% of Gen Z respondents have missed two,” according to the survey. 

Klarna states that less than 1 percent of Affirm’s users ever pay their debts. Similarly, Affirm’s delinquencies of 30+ days were about 1% for the year, according to the Affirm spokesperson. Klarna representatives stated that customers who miss payments are subject to restrictions so that they don’t build up debt.

In countries like the U.K., regulation of BNPL has been increasing. This has led to firms such as Klarna to become more strict with lending requirements

Historically, young consumers begin building credit in their early twenties by paying off credit cards and bills in their name. Consumers with credit cards are reported to credit agencies. If they pay them down on time, it can lead to good credit. That credit becomes important for consumers when applying for loans or mortgages. Ulzheimer stated that not all BNPL transactions reported to credit agencies can severely impact the financial strategy’s value. One example is Affirm does not reportThese loans are interest-free and shorter-term. The interest rates are between 0% and 30%.

Ted Rossman is a senior analyst in’s industry group. He says that BNPL can be a helpful tool if the customer is responsible. However, it can be a slippery slope just as credit cards. Overspending, paying late, and depending too heavily on it can lead to overspending. [buy now pay later]It could even be dangerous.” 

He suggests that consumers view it as more of a steppingstone.

This could be used selectively but you don’t get the full benefit of it long-term.