Buy Now Pay Later Delinquencies on the Rise

As buy now, pay later (BNPL) services have risen in popularity, delinquencies have also increased as inflation is making it more difficult for consumers to pay off debt. BNPL products are typically used by younger borrowers to avoid never-ending credit card debt, as well as borrowers with subprime credit histories.

“You have an industry with a higher concentration of subprime borrowers in a market that hasn’t been effectively tested through [this type of economy], and you have a kind of toxic brew of concerns,” said Michael Taiano, an analyst at Fitch Ratings who collaborated on a report highlighting BNPL concerns, according to the Associated Press.

Financial advisors and consumer advocates have been concerned about late fees with BNPL products, as they can be as high as $34, plus interest, on a small purchase. The Consumer Financial Protection Bureau (CFPB) found that a growing percentage of BNPL loans are being charged off; the charge-off rate in 2021 was 2.39 percent and 1.83 percent in 2020.

A recent CFPB report noted that Americans took out roughly $24.2 billion in BNPL loans in 2021, up from only $2 billion in 2019. Fitch found that BNPL delinquencies increased sharply from March 2021 to March 2022, while credit card delinquencies remained consistent, even though BNPL borrowers are using the services just as much as credit cards, according to TransUnion.

Advisors are also concerned about how easily BNPL loans can be stacked upon each other, as 15 percent of BNPL customers are using the products for routine purchases like groceries and gas. This can be problematic for credit reporting since BNPL loans are not reported with Experian or TransUnion.

“If these buy now, pay later plans are not adequately budgeted for, they can have a cascading impact across a person’s entire financial life,” said Andre Jean-Pierre, a former Morgan Stanley wealth advisor.