Customers who pay with buy-now-pay-later products also frequently “buy now and pay later” with payday loans, credit cards, pawn loans, and other high-interest financial products signaling financial distress.
That’s according to a report from the Consumer Financial Protection Bureau (CFPB) this week, which found that users of buy-now-pay-later (BNPL) services had lower credit scores and less savings. The report also found they were more likely to be delinquent on other kinds of loans, and more likely to overdraft their bank accounts and use alternative credit products—all signs of living on thin financial margins.
Services such as Affirm, Klarna, and Afterpay allow users to make retail purchases and spread the cost, typically over four interest-free monthly payments, potentially offering an alternative to credit cards and other kinds of loans. The government’s consumer watchdog agency is studying the BNPL industry with an eye towards making rules for it similar to traditional products. Regulators have voiced concerns that BNPL encourages consumers to rack up too much debt.
“A common misconception of Buy Now, Pay Later borrowers is that they lack access to other forms of credit. Our analysis shows that these borrowers are more likely to use other credit products,” said CFPB Director Rohit Chopra in a news release. “Since Buy Now, Pay Later is like other forms of credit, we are working to ensure that borrowers have similar protections and that companies play by similar rules.”
The CFPB couldn’t tell whether people used BNPL more because they were under financial pressure, or whether overusing BNPL put them in a bad financial position, or some combination of the two.
The BNPL industry itself is under financial pressure, with major companies’ fortunes having taken a turn for the worse last year after soaring during the pandemic. Swedish BNPL provider Klarna's market valuation dropped 85% last summer when it raised a new round of funding, plunging to $6.7 billion compared with $45.6 billion in 2021. Similarly, Affirm’s stock is down 92% from its 2021 peak.