The True Cost of Buy-Now-Pay-Later Agreements

Table of Contents
  1. How Common is BNPL Lending? 
  2. Are BNPL Loans Good or Bad? 

If you’ve made an online purchase recently, you’ve undoubtedly been offered the opportunity to split your purchase into “four easy payments” or some similar arrangement. These aren’t just financing agreements like you might expect when purchasing furniture, electronics, or other goods that might be out of reach as a one-time purchase. Rather, you may see an offer to make “four easy payments of $16.99” when you order a sweatsuit online. 

Often, it’s not immediately clear that the offer is from a third party that has contracted with the merchant. But, using the buy-now-pay-later option isn’t making payments to the seller over time. It’s a loan. Many consumers don’t realize that when they click the button to split up their purchase into installments, and many don’t fully understand how buy-now-pay-later (BNPL) loans work. And, your BNPL loan may include late charges that are disproportionate to the amount financed.

How Common is BNPL Lending? 

Buy-now-pay-later loans aren’t new. But, in the past few years, they’ve become much more widespread, and are more frequently used to finance relatively small purchases. 

For a recent report, the Consumer Financial Protection Bureau (CFPB) looked at market data for five BNPL lenders. From 2019 to 2021, the number of BNPL loans originated by these five lenders in the United States increased by 970%. In raw numbers, that’s an increase from 16.8 million loans in 2019 to 180 million loans in 2021. That’s nearly one loan for every adult in the United States in 2021. But, that’s not how BNPL loans break out. Instead, the same borrower may have several sequential loans, or even stack loans with different lenders. 

In dollars, usage of BNPL loans increased even more. In 2019, these short-term loans aggregated to about $2 billion in purchases. That number more than quadrupled in 2020, and reached $24.2 billion–more than 12 times the 2019 total–in 2021.

It’s also worth noting that the rapid growth appears to be continuing. Of the 180 million loans generated in 2021, more than ⅓ originated in the final quarter of the year–that’s nearly as many BNPL loans as were originated in all of 2020, and nearly four times as many as were originated in 2019.

What Types of Products Do BNPL Loans Pay For?

In recent years, the range of products purchased using BNPL loans has increased dramatically. In part, that’s due to the increased availability of BNPL options for lower-ticket items. The average value of an order placed using a BNPL loan is just $135. Many BNPL lenders will finance purchases as small as $50. 

More than half of all BNPL loans originated are for purchases from beauty and apparel merchants. The wide range of other purchases made with BNPL loans includes a growing number of essential purchases, such as groceries and gas. In 2019, consumers spent $3.3 million on this type of purchases through BNPL lenders. In 2021, that number had increased to $229 million.

Other popular items include: 

  • Personal effects such as jewelry, electronics and sporting equipment
  • Home goods, such as furnishings and home improvement
  • General goods, such as items from department stores
  • Travel and entertainment

Just 2.6% of BNPL dollars covered services, and only 1.1% went to automotive purchases. 

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Who Uses BNPL Loans? 

BNPL loans are fairly readily available. They can generally be used for purchases in the $50 to $1,000 range, and credit standards are not stringent. In 2021, 73% of BNPL applications were approved. However, there has been some tightening of underwriting standards in 2022.

Of course, not all demographics are equally interested in or reliant on BNPL loans. It probably won’t come as a surprise that BNPL loans aren’t popular with people aged 65 and older. In fact, though that age group makes up about 22% of the adult population of the United States, they account for just 2.1% of BNPL borrowers. People over 50 are generally less likely to use BNPL loans. 

Every age group under 50 is slightly overrepresented among BNPL borrowers. For example, those 18-24 make up 11.7% of the adult population and 16.8% of BNPL borrowers. But, that disconnect is most extreme among people aged 25-33. Nearly ⅓ of all BNPL borrowers fall into this age group, though they make up just 16.2% of the population. 

Are BNPL Loans Good or Bad? 

A BNPL loan can offer a solution when you need something right away and don’t have the cash on hand. But, those “four easy payments” aren’t always so easy. 

First, BNPL lenders generally charge late fees. Though these fees are typically $7-8 per missed payment, they can be significant in comparison to the value of the loan. For example, someone who used a BNPL loan to make a $50 purchase could potentially pay $32 in late fees on that purchase in just four months. More than 10% of borrowers incurred at least one late fee in 2021. And, that’s not the only way a BNPL loan can cost you more than you anticipated.

Many BNPL lenders require that you agree to autopay. That means the lender will attempt to process payment whether or not funds are available, potentially resulting in bank fees and funds being unavailable for other transactions. This problem can be aggravated if the lender re-presents the charge after the transaction is declined. 

Another problem with BNPL loans is that they won’t necessarily appear on your credit report, meaning that they aren’t factored in when you’re applying for other credit–including other BNPL loans. That makes it easy for a borrower to overcommit, only to find that managing multiple “easy payments” each month is actually quite challenging. 

If you are considering using a BNPL loan, make sure that you fully understand the terms, that you’re confident that you’ll be able to cover the scheduled auto-payment, and that it’s the best option for you financially. If you have available credit, do the math on the charges and determine whether it would be less expensive to use your credit card than to take on a new loan and a separate monthly payment. And, when possible, consider holding off and making the purchase when you have cash in hand. 

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