“Buy now, pay later” may lead to high consumer debt, warn analysts

“Buy now, pay later” option, which has recently gained popularity, have alarming default risks associated them, warned analysts.

Analysts said that buy now, pay later (BNPL) options lack in checking consumers’ credit history while analyzing loan applications leading lenders to underestimate the debt levels of consumers, reported CNBC.

Such payment options have come in limelight during pandemic as people, especially young consumers, spend more on online shopping.

Fitch Ratings, in a report, said the debt performance reporting of the sector is “opaque” and the many BNPL providers do not even report the use of such services to credit bureaus.

“Consequently, BNPL debt is often not visible on the credit file and borrowers could try to get BNPL credit from multiple providers,” Fitch analysts wrote. “Lenders (including non-BNPL) could underestimate a borrower’s debt level when underwriting new debt.”

CNBC reported that Stephen Biggar, director of financial institutions research at Argus Research warned that defaults are “one of the primary risks.” He said, “These companies are not doing any kind of credit background check on these individuals. During a downturn, they may be the first to buy now and not pay later.”

Since “buy now, pay later” payment option can used on purchases as low as $10, offers simple application process and cheaper costs of borrowing than credit  cards, their usage soared in the pandemic with online shopping surge.

According to data from Adobe Analytics, in the U.S., BNPL saw a 215% jump year-on-year in the first two months of 2021. Consumers using such services placed orders that are 18% larger compared to the same period in 2020, the data showed.

Fitch also warned that debt through “buy now, pay later” may pile up and result in credit card debt. “BNPL users may find themselves unable to afford the periodic repayments and may turn to credit cards or other forms of high interest debt to repay BNPL debts,” it said. 

(With inputs from CNBC)

Picture Credits: CNBC