"Financial risk looms large for young Americans with 'Buy now, pay later' offerings, according to a money management advisor's cautionary note"
Buy Now, Pay Later (BNPL) services, such as Klarna and Affirm, have gained popularity among young Americans, with millennials making up the largest share of users, but Gen Z and Gen X aren't far behind. However, these services come with potential pitfalls that consumers should be aware of.
The convenience of splitting purchases into installments, often interest-free, can be alluring. But if payments are missed, consumers face late fees and may encounter aggressive debt collection efforts, much like payday loan traps.
Financial experts caution that relying on BNPL plans can lead to unmanageable debt due to the lack of consumer protections and credit-building opportunities that credit cards offer. Research shows that BNPL users who make late payments tend to be more financially constrained or vulnerable, with about 96% of those with late payments facing at least mild financial distress.
The allure of small, interest-free payments can give a false sense of affordability, encouraging consumers to buy beyond their means and potentially increasing default risks.
Until recently, BNPL loans did not impact credit scores, making them "less scary" to some consumers. However, FICO plans to include BNPL usage in its scoring models soon, which may change the credit implications for users.
Market data shows a significant rise in late payments and consumer credit losses associated with BNPL, indicating a growing financial risk for consumers reliant on these loans.
Despite these risks, BNPL services are expected to hit record transaction volumes this year. Financial influencer Haley Sacks, with over a million followers online, has issued a warning about BNPL plans, calling them "predatory."
Sacks advises against using BNPL plans and instead suggests using credit cards with 0% interest pay-over-time options. She argues that credit cards offer consumer protection and the opportunity to build credit.
The shift towards BNPL services may be due to elevated prices, high interest rates, and resumed student loan payments. For young Americans, particularly Gen Z, who are facing inflation and wages not keeping up, BNPL services offer a way to purchase essentials like groceries.
Haley Sacks recently appeared on 'Fox & Friends' to discuss her concerns about BNPL plans. Affirm co-founder and CEO Max Levchin also discussed BNPL on 'The Claman Countdown.'
In summary, while BNPL services offer convenience, their risks include overspending temptations, late fees, debt accumulation, and increasing financial strain for young Americans, especially those already financially vulnerable. Consumers are urged to use these services cautiously and consider alternatives like credit cards with pay-over-time options.
- Interest rates on BNPL loans are often lower or even non-existent, but missed payments can lead to late fees and potential debt accumulation.
- Unlike credit cards, BNPL services currently do not provide opportunities to build credit, but this is set to change as FICO plans to include BNPL usage in its scoring models.
- Market data suggests a growing financial risk for consumers relying on BNPL loans, with a significant rise in late payments and consumer credit losses associated with these services.
- Financial influencer Haley Sacks advises against using BNPL plans and instead suggests using credit cards with 0% interest pay-over-time options, as they offer consumer protection and the opportunity to build credit.
