Pedestrians walk past an advertisement for Klarna.
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When she started holiday shopping late last year, Kiki Andersen struggled to buy gifts for her loved ones. So she turned to a new solution to get through the season: buy now, pay later.
The 31-year-old comedian from Los Angeles used Klarna and PayPal to split a variety of purchases into four interest-free payments, spread over a series of weeks. At the time, her initial costs were about a quarter of the total purchase price.
But now that January has arrived and the other installments begin, Andersen isn't sure how she's going to pay them off. She's buried under a mountain of micropayments and wondering how she'll pay her bills.
“I've definitely sold clothes… if I have to sell a pair of shoes to make a payment, I will,” Andersen told CNBC of the roughly $1,700 she made on buy now, pay later -debt. 'I'm definitely worried [the payments]. It is certainly a concern and I will definitely have to find a way to get the money.”
Andersen is one of many Americans who turned to buy and pay later last year to finance their Christmas purchases to avoid credit card debt, but are now struggling to pay off those bills.
In an era when persistent inflation and record high interest rates are shaping the financial decisions of many consumers, the service has helped fuel a boom in overall online spending, which reached $222 billion from November 1 through the end of December. During the buy now, pay later season, usage reached an all-time high, up a whopping 14% year-over-year and contributing $16.6 billion in online spending.
On Cyber Monday alone, “buy now, pay later” usage rose nearly 43%, according to Adobe.
“Sales, especially online, were likely pressured to some extent by the buy now, pay later approach,” said Ted Rossman, senior analyst at Bankrate. “Many people are attracted to this financing method as an alternative to something like a credit card, with average interest rates at a record high of 20.74%. I would warn that you could still get into trouble if you buy now, pay later. .. can still encourage you to overspend and fool yourself.”
The increase in the use of buy now, pay later comes as credit card debt is at record highs and default rates have nearly doubled in the past two years. As delinquencies hit historic lows during the Covid-19 pandemic, the number of people who haven't paid their credit card bills in more than 30 days recently surpassed pre-pandemic levels, the Federal Reserve said.
It's hard to say how 'buy now, pay later' fits into the country's overall debt picture. Providers offering the service typically do not disclose how often these bills go unpaid, and the debts are not reported to credit bureaus. Klarna, PayPal And To confirm they all refused to buy stock now and pay the delinquency rate at CNBC later.
Affirm has said the short-term and fast-paced nature of its buy now, pay later service makes traditional credit metrics less relevant. It writes off unpaid loans within 120 days, which is why delinquency rates for the service are not disclosed. It does disclose different credit metrics for its longer-term loans.
Klarna and Affirm previously told CNBC that their underwriting strategies ensure that only people who can repay the short-term loans get access to the service, because their business models wouldn't work if people frequently missed payments. While Klarna charges late fees of up to 25% of the purchase price, Affirm does not, according to a review of its terms and conditions.
Klarna said the global default rate for its total business, including buy now, pay later, is less than 1%. In the US, 35% of consumers pay the company back early, the report said.
The opacity surrounding the new service has created a so-called phantom debt phenomenon that has economists, regulators and even shoppers worried about the effect it could have on the economy.
“It's just a vague cloud of debt. No one really knows how it works and it's floating around us all the time and it definitely feels like an impending housing crisis, almost like 2008, but for shopping,” Andersen joked. “That's the myth that Klarna and PayPal are selling you: that you can have this lifestyle, that you can have these things, but the truth is you can't.”
The 'beast' of buy now, pay later
Alaina Fingal, a New Orleans-based financial coach and founder of The Organized Money, typically receives five or six emails in early January from people who overspent during the holidays and need help managing their finances.
This year it was closer to 20 or 25.
“Most people used up all their cash, they ran out of cash, then they put it on a credit card and when they maxed out their credit cards they went to other services like buy now pay later,” Fingal said. CNBC.
Fingal said she spoke with a customer who had two credit cards with a maximum limit and was using two “buy now, pay later” services, which left her struggling to make payments.
“Since she couldn't afford it in the first place, those minimum payments are causing her to struggle a lot to pay for her food and regular bills for the month,” Fingal said. “So it just creates a cycle that becomes more and more difficult to get out of.”
While it's unclear how often the bills buy now and go unpaid later, the people who use them are more than twice as likely to be delinquent on another credit product, such as a car loan, personal loan or mortgage, according to a 2023 study .the Consumer Financial Protection Bureau. According to the CFPB, people who use the service also tend to have higher balances on other credit products and lower credit scores.
As more shoppers use the products, consumers are divided in their feelings about them. In the weeks after Christmas, some on the social media platform
Others called it “dangerous” and vowed to no longer use it as a New Year's resolution. At least one customer said they should use their rent money to pay for their purchase now and pay the bill later.
“Buy now, pay later is a beast. It certainly is. But you have to be the bigger beast,” said Hensley Resiere, a loyal Klarna user, in response to the issues some shoppers are having with the service.
In an interview with CNBC, the 34-year-old refugee agent from Jersey City, New Jersey said: said Klarna helped her give her family an “amazing” Christmas. But when she first started using buy now, pay later during the Covid-19 pandemic, she had trouble keeping up with payments and found herself overdrawn by hundreds of dollars and crushed by the fees.
“When I realized I could still get what I wanted, like designer items, and not have to pay for the entire purchase on the spot, I went fucking crazy. … It was like being a kid in a candy store,” Resiere recalls. “Let's say Klarna gave me $1,000. In my head I thought, 'Oh my God, that's free money.' So I spend the whole thousand and forget that I have rent, car bonus, car insurance, all those bills, groceries, everything.”
Resiere found herself in a cycle where she had to wait for payment to cover her overdrafts. Today, she has a system in place to manage the payments so they don't interfere with her other bills.
“Even though I'm in my career now and I'm obviously making more money, any way I can spread out my payments and not have to worry about bills is something I'm definitely in favor of,” Resiere said. “It spreads out the payments, so I don't really feel it. Yes, I pay the same amount, but the fact that it's spread out doesn't hurt that much.”
Branika Pride, a mother of three who lives in Birmingham, Alabama and works in higher education, told CNBC that she used Afterpay: Block's buy now, pay later service, this Christmas to buy her children an ice cream maker, a PlayStation 5 and Drake concert tickets. She uses different providers, depending on what the retailer offers. Pride said the service came in handy this Christmas as she waited until the last minute to shop and was hesitant to fork over the entire cost of purchases at once.
“I've used it in the past, not as heavily as this time,” she said, adding that she racked up about $1,300 in debt over the holidays to buy it now and pay it off later. “I didn't really get into the holiday spirit until the week of Christmas. So it was just kind of funny at the end, when I just made all the purchases, I was like, 'Ooh, I'm going to regret this for two weeks.'”
Pride said she's never had a problem paying for her purchase now, making payments later and she usually uses the service around payday, so she knows she'll have the money by the time the next installment comes around . She appreciates the flexibility it offers her, but recognizes that it can promote excessive spending or get in the way of her larger financial goals. Without this, she probably wouldn't buy as many discretionary items as she does.
“Every year I say I don't want to carry it into the new year,” Pride said. “But somehow it always comes with me.”
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