Buy now, pay later payment solutions have surged in popularity in the current economy, with the industry projected to grow by 12.2% on an annual basis to reach $122.26 billion this year alone, according to Research And Markets.
By 2030, the U.S. buy now, pay later market is projected to reach $184.05 billion.
The major players are Affirm, Afterpay, and Klarna, which is set to launch an initial public offering on Friday and list its shares on the New York Stock Exchange under the symbol “KLAR.”
The companies have risen to prominence at a time when Americans have been contending with persisting inflation, high interest rates and student loan payments, which resumed in October 2023 after a pause due to the COVID-19 pandemic.
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Consumers leveraged the platforms because they allowed them to pay in equal installments over the course of a few weeks or months. In many cases, they are also interest-free.
Buy now, pay later services have become a mainstay in the retail sector. But it’s increasingly becoming integrated in the travel, healthcare, and electronics industries too, further catering to consumers seeking flexible financing options.
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A March Wallethub survey found that about 55% of Americans have used buy now, pay later (BNPL) services, with 22% currently owing money to a BNPL provider.
Among those who have used the service, 19% have had multiple loans at once in the past year, and 19% have incurred late fees or interest after missing a payment.
A separate Bankrate survey revealed that more than half of adults who have used the service encountered issues such as overspending, missed payments, and buyer’s remorse.
These findings underscore that while BNPL services offer flexibility, they also carry risks depending on how you use them.
“Sometimes, it’s a viable way to access affordable credit and spread out the impact of a big purchase. Other times, it’s a ticket to overspending,” Bankrate Senior Industry Analyst Ted Rossman said. “We can trick ourselves into focusing on the installments rather than the total cost of ownership, and that can lead us to spend more than we should.”
The buy now, pay later services have advertised themselves as a “gentler alternative to credit cards” which can come with high interest rates. However, Rossman said the service is “behaving more credit card-like over time.” For example, Affirm and Klarna have debit cards that can be turned into installment loans.
On top of that, Rossman explained that the service “isn’t just four interest-free payments over six weeks anymore, with many these plans lasting longer and charging interest rates similar to credit cards.
Additionally, consumers can also get hit with late fees if they don’t have the funds to cover the installments. Martha Callahan, certified financial planner at Maryland-based FBB Capital Partners, previously told FOX Business that over time, if a consumer keeps missing payments, they could very easily be handed over to a debt collector,
“It’s similar to using a credit card where you make the purchase now, but when it comes time to pay that debt, if you don’t have the cash on hand to make the payment. You’re just digging yourself into a deeper financial hole,” Callahan said, adding that it can hurt someone’s credit.
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