NEW YORK (AP) More consumers are using buy now, pay later arrangements than ever before.this Christmas season, as the option to spread out payments appears alluring at a time when Americans are already experiencing record-high credit card debt and are still feeling the effects of inflation.
According to data company Adobe Analytics, consumers who use purchase now, pay later this holiday season would spend 11.4% more than they did the previous year. According to the business, consumers will use the third-party services to buy $18.5 billion worth of items between November 1 and December 31, with $993 million of those purchases occurring on Cyber Monday alone.
Because most businesses offering the service only perform soft credit checks and, unlike credit card companies, do not report loans and payment histories to the credit bureaus, buy now, pay later can be especially alluring to customers with low credit scores or no credit history, such as younger shoppers.
Buy now, pay later customers can also feel more secure in the event that a transaction goes wrong this Christmas season. The CFPB stated in May that businesses that provide purchase now, pay later plans must follow additional rules governing traditional credit, like offering channels for contesting transactions and requesting refunds.
Customers usually provide their bank account details or a debit or credit card when using a buy now, pay later plan, and they commit to paying for their products in monthly payments, usually spread out over eight weeks or longer. The loans are advertised as having no interest, very little interest, or just conditional fees (like late fees). Three of the largest buy now, pay later companies are Klarna, Afterpay, and Affirm.
However, consumer advocates caution that consumers who use a credit card to enroll in the payment plans may incur additional costs and interest. This is because, in addition to any late fees, interest, or penalties from the buy now, pay later loan itself, the customer exposes themselves to interest on the credit card payment if it is carried over from month to month. For this reason, experts advise against paying for these programs with a credit card.
According to consumer watchdogs, the programs can induce consumers to overspend because, for instance, not paying the entire price up front gives them more money for smaller purchases, at least in their minds. Additionally, they advise customers to exercise caution when utilizing various buy now, pay later services because there is no central reporting, unlike with a credit card account, and the recurring payments can mount up.
According to Mark Elliott, chief customer officer of financial services firm LendingClub, buy now, pay later might be a creative approach to finance items you’re already planning to make. The problem is that it does encourage excessive expenditure.
That’s part of the allure for merchants. Retailers have discovered that when purchase now, pay later is provided, customers are more likely to have larger cart sizes or to go from browsing to checking out. According to a Federal Reserve Bank of New York survey, consumers spend 20% more when they can choose to buy now and pay later.
According to Elliott, more people are now in a position where they are already dependent on revolving credit as a result of inflation and rising living expenses. Although the psychographics of buy now, pay later may differ, it is still considered debt.
A customer may be subject to fees, interest, or even be prevented from accessing the services going forward if they fail to make a payment.
Since the Fed began hiking interest rates in March 2022, member credit card balances among Gen Z and millennial members have increased by more than 50%, according to internal statistics, according to Emily Childers, consumer financial expert for personal-finance technology startup Credit Karma.
“This holiday season, young people are already in the red,” she remarked. Additionally, the data indicates that they are still spending and burying their heads in the sand.
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