Paying off loans over time can increase young people’s risk of long-term debt

TikTok user @asweetcceleste posted a video of an online shopping cart totaling $318, but with Afterpay it would be split into four payments of around $68.

“I lowered the total a bit, but with Afterpay it seems so much more reasonable,” the caption read. “Should I do it?”

“Buy now, pay later” services like Afterpay, Affirm and Klarna are instant point-of-sale loans that split the cost of a purchase into a payment plan, paid over a few weeks or months. But credit experts said missing a payment can send the consumer into a spiral of debt riddled with late fees and rising interest rates.

These point-of-sale loans are often advertised as safe and accessible alternatives to credit cards and other loan services, as they generally do not charge interest or carry out a thorough credit score check. More than 40% of Americans said they had used a “buy now, pay later” service, according to a survey conducted by LendingTree in April.

While many people use these loans for small, manageable purchases, loan experts have said younger consumers, or “invisible creditors,” can fall prey to large debts. Bruce McClary, senior vice president of communications at the National Foundation for Credit Counselling, said these services appeal to the “credit invisibles” because they don’t need a good credit score to be approved for a line. credit.

“The appeal of buy now, pay later for shoppers is that it makes larger items more accessible for people who don’t want to pay the full price at checkout and also for people who can’t afford to. not be able to access a traditional line of credit,” McClary said.

There are few marketing slogans more alluring than “buy now, pay later”.  Instant gratification.  Getting something you can't afford with nothing but a promise and signature (and these days often not even that) - who can resist?

Anne Grace Hornstein, 22, said she was sticking to her budget and not looking for a credit card. Hornstein has used Afterpay three to five times for “larger, time-sensitive purchases” like new makeup launches and tickets to the Governors Ball, without needing to withdraw from her savings, she said. declared.

“I worked through my summers in college and during the semester I would set up an automatic transfer to my checking account for $50 a week to spend money on,” said Hornstein, a recent graduate of the University. Syracuse University, in an Instagram post. “Afterpay has helped me make larger purchases without going over my weekly budget.”

The Consumer Financial Protection Bureau opened an investigation last year into buy now, pay later credit to “gather information about the risks and benefits of these fast-growing loans” provided by companies such as Affirm , Afterpay and Klarna. The office primarily deals with debt accumulation, data collection and regulatory arbitrage.

A Klarna spokesperson said the company supports more buying regulation now, pays suppliers later to ‘raise’ standards and improve consumer outcomes by providing more consumer choice and protections. . Klarna’s consumer base grew by 60 million consumers between 2020 and 2022, the spokesperson said in an email.

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“We are seeing a global shift in consumers who are increasingly turning away from the greed-fueled practices of traditional banks and high-cost credit cards,” the Klarna spokesperson said.

A spokesperson for Affirm said younger consumers wanted more “flexible and transparent” payment options instead of using credit cards. Living on debit alone can limit a consumer’s purchasing power, which is why many consumers have turned to Affirm to purchase products, the spokesperson said.

“We believe that consumers, particularly millennials and Gen Z, lost trust in financial institutions after 2008 and increasingly prefer more flexible and innovative digital payment solutions,” the spokesperson said. ‘Affirm in an email.

More and more companies are now entering the buy now, pay later scene. Apple announced in June that it would launch Apple Pay Later, a buy-it-now, pay-later service that will split purchases into four equal payments that customers will have six weeks to repay, with no added interest or fees.

Traditional stores, like Macy’s and Target, are now signing up for these programs to encourage customers to buy more from their websites. Online stores that offer Afterpay are more likely to have customers spend up to 40% more per order, according to the Afterpay website.

“Offering Afterpay can increase average order value, increase incremental sales, and attract new customers,” the Afterpay website states.

Although there is financial flexibility, some consumers have posted on Facebook groups that they have had problems with services charging them for purchases that were never delivered to them. Teri Blesch, a New Jersey state employee, said she had used Afterpay for many purchases before, but after the service charged her for a furniture purchase that was never processed, she won’t use it again.

“I’ve been back and forth with Wayfair and Afterpay for almost two months trying to rectify the situation,” Blesch said.

McClary, senior vice president of communications at the National Foundation for Credit Counseling, said the “biggest risk” is mismanaging the amount of debt because it’s easy to use services like Afterpay for multiple purchases. Many of these services don’t have checkpoints for overspending, making it easy to accumulate debt. He said that because most of these services do not signal good behavior to creditors, consumers’ credit scores will not improve and may even be negatively affected.

Afterpay and Klarna do not report financial information to credit bureaus, but Affirm may report late customer payments to bureaus, which could lower credit scores. These companies may perform a “soft credit check”, an investigation that does not affect your credit score, when first using their services.

“You could rack up a lot of debt very quickly because there’s a very low barrier to entry with these buy now, pay later arrangements,” McClary said. “You don’t have to go through a credit check. Just click your all the way through, and within an hour or two, you can end up with four, five, six, or even one dozen buy now, pay later arrangements that you are now committed to paying back.

AfterPay charges $10 for any late payment, with $7 for each subsequent payment. Affirm does not charge any late fees, but they can report late payments to credit bureaus, according to their website.

Annie Millerbernd, private lending expert at NerdWallet, said most consumers find it difficult to manage loans because they use another buy now, pay later service before repaying their other loans.

Millerbernd suggests consumers create a list of products they want to buy with buy now, pay later services to minimize the risk of overspending. She said buying now, paying later will help consumers manage it more easily than taking out multiple loans for multiple purchases.

Consumers used these services more during the pandemic to ease their financial burden by setting up payment plans for the products they needed, Millerbernd said. These companies buy now, pay later have made services “mainstream” by boosting advertising and making their services visible on social media and online shopping sites, she said.

“Buy now, pay later existed before the pandemic and really accelerated during the initial shutdown a few years ago,” Millerbernd said. “People were working from home, they were shopping from home, and it was also a time of financial uncertainty for people.”

Hornstein, a Syracuse University graduate, said she didn’t have a credit card, but she probably wouldn’t need to use Afterpay once she got one. She said she would rather save for a larger purchase than have to pay for it over a longer period of time if she had the money to do so.

“I’m likely to use the service again if it was an emergency purchase, but otherwise I’d rather save than have a purchase that threatens me,” Hornstein said.

Lauren Sforza is a reporting intern for the USA TODAY Network’s Atlantic Region How We Live team. Contact Lauren at [email protected]

Harry L. Blanchard