“Buy now, pay later” services such as Affirm, Afterpay and Klarna can sometimes provide a cheaper, more accessible version of credit. These services essentially provide customers with an alternative way to pay for purchases over time without going into credit card debt or taking out a traditional personal loan. Travel purchases, such as airline tickets and vacation rentals, are the fastest-growing buy-now, pay-later segment. However, the Consumer Financial Protection Bureau warns that using it can be even more expensive. These services usually involve late fees and can cause passengers to spend more than they would otherwise.
Book a flight or hotel room now and pay later? It’s an increasingly common trend in travel spending. Companies like American Airlines , United Airlines and vacation rental website Vacasa now offer the option to book now and pay back gradually over time with “buy now, pay later” services.
Between 2020 and 2021, travel and entertainment purchases were the fastest-growing segment of the buy-now-pay-later phenomenon, according to a September 2022 report by the Consumer Financial Protection Bureau.
Buy Now Pay Later is an alternative type of short-term online shopping loan offered by companies including Affirm, Afterpay and Klarna. The buyer receives the purchase immediately and pays it back later, usually in four installments or monthly payments.
While buy-now, pay-later has been popular for years in segments like apparel and beauty, it’s slowly growing in other areas, including insurance, education and groceries — with travel outpacing them all.
In 2019, only $10 million was spent on buy now, pay later services. It grew to $60 million in 2020 and $800 million by 2021, recording a staggering 1,233% increase in one year and a 7,900% increase in two.
But that growth is not necessarily good. In fact, the CFPB warns that this is a worrying trend.
USER PROBLEMS BUY NOW, PAY LATER
Buy now, pay later can lead to confusing terms, challenges in filing and resolving disputes, and strict requirements, such as mandatory use of automatic payment. And because it can encourage buyers to take on more debt than they can afford, buy now, pay later, it can sometimes do more harm than good, many experts say.
LATE FEES
Many buy now, pay later services charge late fees, usually around $8. According to the CFPB, 10.5% of buy-now, pay-later borrowers were charged at least one late fee in 2021.
FORCED AUTO PAYMENT
Some buy now, pay later loans require automatic payment, which can be problematic for people who don’t have enough funds in their linked payment accounts, as they could incur a late fee from the buy now, pay later company, as well as an overdraft fee from their the bank.
According to the CFPB, 89% of 2021 pay-later purchases were made with a debit card, opening up the possibility of overdrafts on underfunded accounts. One in three users reported an overdraft in January 2022, according to a survey by Morning Consult, a market research organization. An overdraft usually triggers its own fee.
Pay off purchases now, pay later credit card purchases aren’t any better, although some do.
“This practice — essentially using a credit card to pay off other debts — is a sign of inability to pay,” the Center for Responsible Lending and other groups said in a March 2022 joint report.
OVERSENDING
Buy now, pay later services have access to customer purchase data, which can then be used in future marketing campaigns — likely driving even more spending. And that’s not the only type of overextension that puts consumers at risk.
A 2022 Motley Fool survey found that reasons for using buy now, pay later include:
● For purchases that do not fit into my budget (45%).
● For lending money without a credit check (21%).
● I can’t get approved for a credit card (14%).
● My credit cards are maxed out (13%).
BUY NOW, PAY LATER IS NOT ALL BAD
If paid on time, interest-free buy now, pay later offers an affordable alternative to credit cards, which typically charge interest on outstanding balances. With clear payment dates and fixed amounts, buy now pay later services can help with budgeting. And for cash-strapped people who need to make an urgent trip, such as visiting a sick relative, buying now, paying later may be the only option.
For others, buy now pay later services can free up cash flow. That was the case for Chris Pantelli, who runs a UK-based financial coaching website. Pantelli needed a break after a difficult year marked by illness, the abandonment of his partner and long work weeks.
Still in the process of splitting finances with his ex-partner — and wanting cash on hand for his small business — he turned to AfterPay to cover his $1,200 trip to Turkey, which he paid for in four installments over six weeks.
“There was absolutely no way I was going to default on my payments,” he says. “I couldn’t see the downside.”
It worked for Pantelis. But that doesn’t work for everyone — and that’s a problem the CFPB says it’s working to fix.
Buy-now, pay-later providers are already subject to some federal and state oversight, but not all states require all buy-now, pay-later products to be licensed or registered. That could change, CFPB Director Rohit Chopra said in a September 2022 statement.
“We will work to ensure that borrowers have similar protection, regardless of whether they use a credit card or buy now and pay off the loan later.”
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Sally French is a writer at NerdWallet. Email: sfrench@nerdvallet.com.
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