The first time she used a “buy now, pay later” service, Samantha didn’t think much of it. The 22-year-old simply needed furniture for her new house but didn’t have the money.
Samantha had long prided herself on being frugal. Frightened early on in life by stories of debt and overspending, she became averse to credit cards and saved diligently for occasional extravagances like restaurants and trips.
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But in the middle of last year, she needed a couch, a TV, and a table. That’s when she decided to use a new service called Affirm, which allowed her to buy all three things on Wayfair and split the payments into a series of more manageable installments.
“I just thought, ‘Oh, this is the best way to do it,’” she said. “Somehow, I convinced myself that ‘buy now, pay later’ services were different.”
Samantha, who asked to use a pseudonym and lives in Louisville, got the furniture and made the subsequent payments on time. That was fun, she thought to herself. After that, though, Samantha started to also use another “buy now, pay later” service, Afterpay, and shopped at stores like New Balance, Urban Outfitters, Reebok, Blamo, and Obey. Quickly, her frugality was replaced with a “shopping addiction,” she said. “I know I have an issue.”
“It’s easy to get sucked in,” one “buy now, pay later” user said.
The entrance of “buy now, pay later” into the financial system has led to a furious debate that has consumed regulators, politicians, and TikTok users about whether the new financial product is good or bad. But the messy truth might be that it embodies two seeming contradictions at once. The “buy now, pay later” system may very well be an improvement on the credit card system and its cycles of compounding debt while still encouraging overspending among the financially marginalized and vulnerable—two groups who can least afford it and are also more likely to use the industry’s services.
Stories like Samantha’s get at the heart of the intensifying debate: By the standards of the industry, she has remained financially responsible from her very first purchase, never having missed a payment and diligently forking over thousands of dollars. Because she used “buy now, pay later,” she did not have to deal with the high fees and compounding interest that comes with credit cards, and today, she is close to paying off her balance.
Nevertheless, she hopes to quit the services and move on; though, again, if she does, she will leave relatively unscathed in the long run. Did the services help her when she needed money with minimal long-term damage, or did they convince her to spend more over time than she otherwise would have? And if the answer is “both,” which matters more?
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The “buy now, pay later” proposition has become an almost omnipresent aspect of the American shopping experience. “It’s very enticing. You can’t escape it,” said Marshall Lux, a Harvard Kennedy School research fellow who studies the industry. The increasingly popular idea flips the traditional layaway plan on its head: Instead of putting down money over time and receiving a product at the end, people can now order the product immediately using “buy now, pay later” and then pay it off in installments, often with little to no interest and lower fees than come with credit cards. By being more open to who they accept as customers, “buy now, pay later” has become particularly well utilized by marginalized groups including young people, Black and brown Americans, and people with low credit ratings.
The companies and their proponents say that this new system offers “a fairer and more sustainable alternative” to credit cards, as the spokesperson of one of the companies, Klarna, put it to Motherboard. Generally, the credit card industry profits from a customer’s inability to pay, pulling in $120 billion a year in interest and fees. The situation is made worse when families must carry a credit card balance and pay additional compounding interest as a result, sometimes trapping them in a cycle of debt.
“Shoppers who use Afterpay spend +40% more than those who do not,” Afterpay says on its website.
By comparison, “buy now, pay later” companies say they don’t win when customers fail to pay—they make a much smaller percentage from fees—and as such they’ve built systems that help people succeed financially, avoid long-term debt, and remain reliable customers.
While the companies have their differences, the services by and large charge little to no interest (and especially no compounding interest), small late fees (if any at all), and often restrict spending after a failure to make a payment. Spending limits are more closely limited and monitored, sometimes even on a purchase-by-purchase basis, and balances are much lower than on credit cards as a result. According to Klarna and Afterpay, for example, their typical balances are $70 and $200, respectively—much less than the typical outstanding credit card, which was $5,500 last year, according to credit reporting company Experian.
And yet, stories abound of people who, like Samantha, found themselves buying more than they could afford once they started to use “buy now, pay later.” That is arguably the point. “Buy now, pay later” companies primarily make money by charging merchants a fee of 1.5 to 7 percent when a customer buys something using a “buy now, pay later” service. Businesses will gladly accept the fee, as it makes customers more likely to check out and buy more.
“It is not accurate to say that Affirm makes users less financially responsible or helps convince people to spend more than they should,” an Affirm spokesperson said.
One survey put out by the lending marketplace LendingTree found that almost 70 percent of “buy now, pay later” customers bought more than they would if they had to pay for everything at once. Another survey by the Financial Health Network found almost half of those polled “said they would not have made a purchase or spent more than they otherwise would have spent had BNPL not been available.” Companies like American Eagle and Southwest Airlines have explicitly said “buy now, pay later” boosted their sales.
“‘Buy now, pay later’ is very attractive to merchants because they find they sell a lot more, and that’s good for them,” said Lauren Saunders, an associate director at the National Consumer Law Center who has testified before Congress about the industry.
The companies say so themselves. “Increase your sales with Affirm” and “keep your customers coming back,” Affirm tells potential merchant partners, citing an 85-plus percent increase in order value. “Shoppers who use Afterpay spend +40% more than those who do not,” Afterpay says for its part, adding that they shop “+50% more frequently” too. Klarna boasts its own “41% increase in average order value” and a “30% increase” in the number of people who check out.
The companies argue this is evidence not of overspending, but of customers who now have better financing options. “It is not accurate to say that Affirm makes users less financially responsible or helps convince people to spend more than they should,” an Affirm spokesperson told Motherboard (the emphasis was hers). Klarna said that its own internal data showed “little” evidence of overspending, and that the default rate on the platform was less than 1 percent, which she noted was less than is standard within the credit card industry.
Overspending, of course, is a subjective term, and consequently one that is difficult to quantitatively pin down. If someone feels they are overspending, but they continue to make all their payments, have they overextended themselves? Or is the system working?
It started with boots for Lissette Monzon, a high school teacher in Miami. There was one $700 pair she could not afford “in any universe,” she said. Like many others, Monzon had an aversion to the interest that came with credit cards. So when she found out that she could pay for the boots over time using Klarna, she was thrilled. It made the purchase manageable.
From there, Monzon started to use “buy now, pay later” regularly. She made purchases on the home shopping network and at Sephora and Intermix. On their own, none of the purchases seemed too concerning, especially in installments. But they added up. “You’re still paying it, obviously. It’s just you don’t feel it as much,” she said. “It’s easy to get sucked in.” Saunders, the associate director at the National Consumer Law Center, said that is the point. “It’s designed to make things look cheaper than they are, more affordable than they are,” she said. “But that’s not necessarily good for individuals who are buying more than they can really afford.”
The services also masked her spending. Monzon’s husband, for example, had no idea how much the boots cost and wasn’t aware of how much she was spending in total, she said. He would see charges month after month from places like Sephora and ask her to call the company, concerned they were double charging.
Then, after her son lost her debit card, she struggled to remember all of the institutions she owed money to. One day, she received a letter informing her that she owed money on a missed payment. Monzon’s mother had always had always stressed the importance of maintaining good credit, and she was horrified with herself. As soon as she could, she made the payment and shut down all her “buy now, pay later” accounts, hoping to set a better example for her two children moving forward.
“I need them to be responsible with their money, and I was not being responsible,” she said.
Tanya Rudra, a journalist in Germany, has found it harder to control her spending since her own bank started offering a version of “buy now, pay later” last year as well. The installment service allowed her to spend more than she would have otherwise, and she found herself spending all the money available to her—so much that she had trouble keeping track. Instead of buying one bottle of perfume, she would buy two or three. Recently, she promised herself she wouldn’t go over a 500-euro budget she had set for new television. But at the store, the salesman showed her more expensive set-ups, and she priced out what it would cost if she paid in installments. In the end, Rudra ended up spending 850 euros.
“It has become a problem,” said Rudra. “I need to stop and I don’t know how to stop.”
Rudra has never missed a payment, which, according to some, is relatively common in the “buy now, pay later” world. Afterpay said that in the 12 months ending in June, 95 percent of installment payments were made on time, and 98 of purchases had no associated late fees. The moment they do miss a payment, they cannot make further purchases, “which ensures that he/she can’t fall into the revolving cycle of debt,” an Afterpay spokesperson said.
“By the time somebody is defaulting on their ‘buy now, pay later’ payment, they’re in deep, deep trouble.”
Outside surveys put the likelihood of missed payment higher, including one from the personal finance company CreditKarma that found 34 percent of “buy now, pay later” users had fallen behind on a payment.
But even if “buy now, pay later” customers don’t technically fall behind, the debt can still financially stretch them beyond comfortable limits. “People can be struggling even before the ‘buy now, pay later’ company stops getting payments,” said Saunders. “By the time somebody is defaulting on their ‘buy now, pay later’ payment, they’re in deep, deep trouble.”
Data show that the argument that “buy now, pay later” customers use the services as a cash-management tool and are largely spending within their bounds is not the entire story. Surveys have found that “buy now, pay later” customers’ total debt increases once they use the services. One in three “buy now, pay later” customers in the U.S. overdrafted in January, a significantly higher percentage than adults overall; and a quarter of financially vulnerable people who use “buy now, pay later” struggle to make the payments; and more than two in five end up borrowing money elsewhere to cover their payment installments in the U.K.
“It’s hurting people who can least afford it,” said Lux, the Harvard fellow.
Nevertheless, a large number of people are starting to see “buy now, pay later” as the preferable financing alternative in the U.S., where the number of people who have used them reportedly increases by 300 percent each year. One study put out this month by the consumer insights firm J.D. Power found Amercians now often prefer to make large purchases using “buy now, pay later” options instead of their credit cards.
“There’s a high certainty that you’re going to get the limit you need,” Sezzle CEO Charlie Youakim has said.
But the growing popularity of “buy now, pay later” could also be related to the fact that the services are relatively accessible in the U.S. In fact, the process has been described by researchers as “nearly instantaneous.” Afterpay has said it does “no external credit checks or reporting to credit bureaus.” The CEO of Sezzle, another “buy, now pay later” service, went so far on a podcast published in May as to say that the company approves 90 percent of people who apply—even if the company can’t find anything about the person’s history—and for the most part only turns down suspected fraudsters and people who have already missed a payment.
“There’s a high certainty that you’re going to get the limit you need,” CEO Charlie Youakim said then.
To make its determinations, Sezzle said it considers “alternative’” credit data like past utility payments, which he says is cheaper than FICO scores to obtain.
(A Sezzle spokesperson told Motherboard the podcast was taped in February and that the company has “made a number of changes since then, so that quote is no longer accurate.” Follow-up questions asking about the specific changes and inaccuracies went unreturned.)
Nadine Chabrier, a senior policy counsel at the Center for Responsible Lending, sees less traditional checks like these as evidence that the companies do not closely enough consider people’s finances and overall debt before lending money to them. While credit card companies can temporarily lower someone’s credit when they perform a “hard” credit check, they do so in order to better understand the entirety of someone’s financial situation. By not doing the same, “buy now, pay later” businesses could put someone in “a situation where they are overextended financially,” she said.
Affirm: “other buy now pay later players … do not underwrite at all.”
Unsurprisingly, at least some of the companies don’t see that as the case, believing their processes to be modern but comprehensive while also noting that it is the company that takes on the risk. Affirm, for example, says it performs a fast but in-depth analysis using some credit report data as well as “proprietary,” “Affirm-specific” data each time a user wants to buy something using the service to deduce whether they can afford it. The CEO has said this process protects customers from “overextending themselves,” and a spokesperson said the “soft” credit check allows customers to avoid temporarily hurting their credit.
“Sure, we make it easy and convenient to ask, but we will still look at your credit situation at that very moment and decide — and if we believe you won’t be able to pay off your loan, we will, in fact, decline your application – with compassion and transparency – without fail,” CEO Max Levchin wrote in June.
Hoping to further differentiate Affirm from its competitors, a company spokesperson added that “other buy now pay later players … do not underwrite at all.” But even Affirm stated proudly when it went public that it approved 20 percent more customers than its competitors, according to Bloomberg. (Subtle intra-industry criticism is not exclusive to Affirm. The Klarna spokesperson went out of her way to remind Motherboard that “as a licensed European bank we are quite different from other BNPL providers.”)
Because of the more lenient approval process, the industry attracts people who are less likely to be approved by traditional lenders. Gen Z is more likely to use the platform, as are Black and brown Americans, and the credit reporting agency TransUnion has found that compared to the average person, “buy now, pay later” customers have worse credit ratings and are more likely to be past due on payments. Where the line between overspending and increased spending lies with such groups is hard to determine.
The growing popularity and use of “buy now, pay later” services has concerned advocates, researchers, and government officials and agencies, including the U.S. Consumer Financial Protection Bureau, which started investigating in December, citing potential regulatory arbitrage and the accumulation of debt. Others have become similarly skeptical.
“We want to make sure that people have access to credit only when it’s affordable and constructive, and not when it’s going to put them into a debt trap,” said Saunders. The “buy now, pay later” companies Motherboard spoke to said they want the same thing and support “proportionate regulation” of the sector, as the Klarna spokesperson put it.
In Diana Almonte’s opinion, something about the system needs to change. A project manager in the New York area, Almonte said she became almost addicted to “buy now, pay later” after she started using it. The first “buy now, pay later” service she used was Afterpay, but she soon added on services like Affirm, Klarna, Sezzle, and Zip.
Almonte loved the ease with which she could buy things like Louis Vuiton nude pumps, but like the others, found over time that it also made it difficult for her to control her spending.
“I wanted to be able to buy all these different things at the same time,” said Almonte, who asked that Motherboard use a name not professionally associated with her.
Almonte kept a spreadsheet of all of her “buy now, pay later” purchases to keep tabs, but the list became overwhelming, and she started to fall behind. Soon, she received a collection notice from a debt collector, which showed up on her credit report.
“It’s literally like having a bunch of drug dealers that are just there for you whenever you need it,” she said.
