Why 'Buy Now Pay Later' could be wrecking your financial future

Buy now pay later users are increasingly paying much later.
Klarna, one of many companies that allow users to purchase something now and pay in installments over time, said last month consumer credit losses in the first three months of the year rose 17% from a year ago as users struggled to make payments. That confirmed earlier surveys showing a similar uptick. A survey by LendingTree showed 41% of users paid late at least once in the past year, up from 34% a year ago. Bankrate's survey showed 18% missed a payment.
With the economy slowing and big pandemic savings long gone, financial advisers are warning users, who tend to lean younger, BNPL could be wrecking their financial future.
'If using BNPL, it's likely you don't have savings to cover the costs of making purchases,' said Rick Miller of Miller Investment Management. 'Saving for retirement is likely not even a thought in your mind. You need to pay yourself first and shouldn't be spending what you can't afford.'
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Buy now pay later expands: Costco, Affirm partner to launch buy now, pay later option for online orders
Why do people use BNPL?
Americans often use BNPL to purchase a good or service they can't currently afford. They make an initial payment and spread out the rest of the cost over time and pay in installments. In essence, they're taking a loan for the balance.
A quarter of BNPL users say they've used the loans to buy groceries, said LendingTree's survey of 2,000 U.S. consumers ages 18 to 79 from April 2 to 3. That's up from 14% just a year ago, amid rising prices at the supermarket, it said.
A third of users see BNPL as a 'bridge' to their next paycheck, LendingTree said. That's up from 30% last year and 27% the year before.
Clothing, including shoes and accessories, is the item most commonly bought using BNPL, followed by technology devices and home décor, LendingTree said.
The average purchase amount was $142 in 2022, the most recent year of data, according to the Consumer Financial Protection Bureau (CFPB). However, it noted approximately 63% of users had multiple BNPL loans.
How can BNPL jeopardize your future
Overspending: 'Relying on BNPL and short debt gives consumers a false sense of affordability, making it easier to overextend financially,' said Haiyan Huang, chief credit officer at Prosper.
'Relying on BNPL and short debt gives consumers a false sense of affordability, making it easier to overextend financially,' said Haiyan Huang, chief credit officer at Prosper. Limiting future borrowing: 'If BNPL is helping you make purchases you cannot afford to pay back, then your credit score could take a hit,' especially if you miss payments, Miller said. 'This can hinder your ability to borrow in the future, which could be crucial as you get older and seek a mortgage (or) car loan.'
BNPL payment history usually isn't reported to the major credit reporting companies, but a failure to repay may be reported by a debt collector, CFPB said. BNPL companies also can restrict your use in the future.
Credit scores help determine 'interest rates for loans and mortgages, your insurance premiums, rental approvals, credit limits on credit cards, and can potentially impact employment,' Huang said.
Messing with spending and budgeting mentality: 'You may feel like you can make any purchase you want; however, it's likely not the case,' Miller said. 'Future spending, like in retirement, can't be done erratically, as you'll be on fixed income." Also, 'budgeting is something you need to do for your future self, especially when retirement comes around.'
What can BNPL users do?
The first thing everyone, not just BNPL users, should ask themselves when considering taking on debt is whether the purchase is essential, Huang said.
If yes, then consider the repayment schedule and how it might affect repayments on other debt.
It's also important to explore all your options before borrowing money, Huang said. Check to see if financial assistance is available. Consider tapping into your equity if you own a home or taking out a personal loan to cover the expenses with a lower interest rate, she said.
'Fixed-rate personal loans can be a strong tool for consolidating high-interest debt or covering major one-time expenses without the confusion or financial juggling BNPL often creates,' Huang said. 'They provide predictable monthly payments, clear repayment terms, and often lower interest rates than credit cards.'
Note, most personal loans are reported to credit bureaus, but that's not necessarily bad. 'When used responsibly, (they) can help build or strengthen credit history,' she said.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.

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