More Americans Expected to Embrace ‘Buy Now, Pay Later’ Payment Plans for Holidays, But Credit Experts Are Concerned

This Christmas season, shoppers are predicted to make heavy use of "buy now, pay later" payment arrangements, which is good news for stores but has credit experts once again sounding the alarm.

The short-term loans sometimes come with consumer-friendly interest rates and enable buyers to make a down payment at checkout and then pay the balance in installments. That may be attractive to a buyer who has to balance other debt, like school loans or credit cards, while buying many presents for loved ones throughout the holiday season.

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Holiday Shopping

According to the statistics, the loans are mostly used by younger customers and those who have credit issues. As reported by the Federal Reserve Bank of New York, the use of payment plans may help more people get access to the financial system. However, the Fed and several experts have warned that the proposals' central components might encourage excessive borrowing by consumers.

A recent analysis of online shopping conducted by Adobe Analytics indicates that consumers borrowed $6.4 billion in short-term installment loans in October, driving online spending up 6% year-over-year, as reported by AP News. Adobe forecasts a high in November when users will spend $9.3 billion. Cyber Monday alone, on November 27, is expected to set a new daily record of $782 million.

Adobe predicts that 20% of American consumers will choose a "buy now, pay later" payment option while shopping for the holidays.

Rising interest rates, food price inflation, and student loan repayments have increased consumer costs, but data shows that consumers are resilient going into holidays and are jumping at every chance to manage their budgets more efficiently, said Adobe Digital Insights lead analyst Vivek Pandya.

Short-Term Loan

"Buy now, pay later" adheres to a standard pattern. Lenders often do a mild credit check, require a down payment before closing, and set payment schedules anywhere from four to six biweekly or monthly installments. Common introductory offers include loans with no interest.

However, the consumer may lose access to the service, incur interest or fee charges, or both if they pay late or skip payments. Fees like these might be as little as $25 or as high as a set percentage of the total loan balance.

Merchants who benefit from the installment payment system often pay the service's fees. Offering a "buy now, pay later" option has been shown to increase the average order value and the percentage of customers who actually complete a purchase for businesses that provide it. According to surveys cited in the Fed's study, consumers spend 20% more when given the option to "buy now, pay later."

The three major credit reporting agencies often are not informed of these short-term loans. Thanks to the fact that these loans don't factor into credit scoring, this is a major selling point. The experts are concerned about this aspect of "buy now, pay later" since it might encourage customers to incur debt with several lenders, which is a practice known as loan-stacking, Fortune reported.