(NewsNation) — Americans have long relied on credit cards, but a newer financing trend known as “Buy Now, Pay Later” is gaining traction, with many consumers turning to short-term payment plans to cover everyday essentials like gas and groceries.
A recent NerdWallet survey found that more than half of Americans (55%) have used buy now, pay later services and research suggests the option is especially popular among younger consumers.
Buy now, pay later is exactly what it sounds like — a short-term financing option that lets consumers buy an item and pay it off over time in multiple, typically interest-free installments.
It’s like a modern-day layaway program but reversed. Instead of claiming an item and taking it home after paying in full, you get it upfront for a small deposit.
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At first glance, BNPL might not seem all that new. For years, Americans have financed big-ticket items like furniture and appliances. What’s different now is that consumers are using BNPL platforms like Klarna, Affirm and Afterpay for smaller purchases like clothing, groceries and even takeout.
Food delivery giant DoorDash made headlines in March when it announced a partnership with Klarna that allows customers to “eat now, pay later.” The news sparked a wave of social media memes, with users joking that the next recession would be driven by unpaid burrito loans.
A recent LendingTree survey found that 25% of BNPL users have used the loans to buy groceries, up from 14% a year ago. The share is even higher among Gen Z BNPL users (33%).
Experts NewsNation spoke to said BNPL services can be useful in certain situations, but urged caution, especially with day-to-day purchases.
“You could technically buy a $30 bottle of shampoo and pay it off in several installments, but just because you can doesn’t mean you necessarily should,” said Sara Rathner, a credit cards expert at NerdWallet.
Ted Rossman, a senior industry analyst at Bankrate, explained a scenario where BNPL can make sense.
“I continue to believe the best use case for BNPL is isolating a single big purchase that you want to get some cash flow benefits, like the couch or the new set of tires or the refrigerator,” Rossman said.
How does buy now, pay later work?
BNPL loans come in several different forms, but “Pay in 4” programs are some of the most common.
In that scenario, a purchase is divided into four equal, interest-free installments, typically paid every two weeks. The first payment is due upfront, and then the remaining three are spread out.
For example, if a shopper buys an $80 jacket using a “Pay in 4” BNPL plan, they’d pay $20 upfront followed by three $20 payments every two weeks until it’s paid off.
The appeal is straightforward: BNPL lets consumers spread out the cost of their purchases over time, usually without incurring extra fees. It’s effectively a free loan.
So, how is BNPL different than a credit card?
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“There’s no credit check, there’s no lengthy application process. It’s as quick as buying something in the first place,” Rathner said.
Unlike a revolving line of credit, which allows consumers to carry debt month-to-month, BNPL products are more structured, with a fixed repayment schedule usually spanning a short period, such as four to six weeks.
“Many people are drawn to buy now, pay later because it feels more responsible than using a credit card,” Rossman said. “You know exactly how much you owe for exactly how long.”
Another perk of BNPL is that there isn’t “that much of a punishment” if you miss payments, Rossman pointed out. Some providers don’t charge late fees, and when they do, they tend to be pretty small.
Until recently, most BNPL lenders didn’t report payment history to major credit bureaus, so missing a payment was unlikely to tank your credit score unless the loan was sent to collections. But that’s starting to change depending on the platform.
Members of the public pass by a floor advertisement for tech firm Klarna, a European ecommerce company which allows users to buy now, pay later, or pay in installments. (photo by Daniel Harvey Gonzalez/In Pictures via Getty Images)
What are the risks of buy now, pay later?
American consumers have a long, complicated history with debt, and some fear that BNPL is another tool pushing many to spend beyond their means.
Nearly 30% of those who have used BNPL said they spent more than they should have, according to a 2024 Bankrate survey. Some 17% of users said they regretted a purchase.
Research from the Consumer Financial Protection Bureau found that consumers who use BNPL tend to have a riskier credit profile. From 2021 to 2022, borrowers with deep subprime credit scores accounted for 45% of BNPL originations, while those with subprime scores accounted for another 16%.
And unlike purchases on a single credit card, which appear on one monthly statement, BNPL loans can be spread across multiple providers, making them difficult to track.
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“It is easy to get in over your head if you have multiple installment payments due at the same time and you have other bills to pay,” Rathner said.
According to the CFPB, nearly two-thirds of BNPL borrowers originated multiple simultaneous loans at some point in 2022, and 33% took out loans from multiple lenders.
The multi-loan balancing act is important to watch, especially since BNPL users tend to be younger, less credit-savvy consumers.
Returns are another pain point, according to nearly 20% of users in Bankrate’s survey.
“It’s like there’s a middleman involved,” Rossman said. “Sometimes you return something to a retailer and you want your money back, and the buy now, pay later company still wants their cut.”
How do buy now, pay later companies make money?
There’s no such thing as a free lunch in business, even in a world where you get to eat before you pay.
BNPL companies make money through fees charged to retailers, which can be significantly higher than the cut merchants pay to traditional credit card companies.
Rossman said merchants often pay between 5% to 6% of the transaction to BNPL providers. By comparison, processing fees for credit cards are around 2%.
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Retailers are willing to pay that premium because consumers are more likely to buy — and spend more — with BNPL.
One recent study looked at transaction data from a large U.S. retailer and found that BNPL adoption led to “immediate and substantial increases in spending.”
Consumers’ purchase likelihood increased from 17% to 26%, and their basket sizes were 10% larger on average than they were before BNPL, according to the report.
“Remarkably, these increases in spending were not short-lived: They persisted for close to six months, showing that BNPL drives lasting gains rather than short-term spikes in consumer spending,” the two researchers from the UK concluded.
Many BNPL lenders also make money from late fees that are collected if users miss a payment. Those fees accounted for 7% of revenues for major lenders in 2021, per the CFPB.
Is buy now, pay later a ticking time bomb?
Two years ago, The Atlantic warned that the “buy now, pay later bubble is about to burst,” arguing that “the new debt, in many ways, is exactly the same as the old debt.”
Part of the skepticism stems from the fact that BNPL is still relatively new. While the risks of credit card use are widely understood, TikTok users frequently praise the benefits of BNPL — often dubbed “afterpay” by younger consumers — with few caveats.
“Girl math is when you use ‘afterpay’ for literally everything,” one user said in a widely viewed TikTok. “I’m going to buy a lot of things in two months that are more expensive than $25, why do I care about a second payment?”
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In other words, BNPL may not just be another way to pay — it could fundamentally reshape consumers’ shopping habits.
A 2022 study found that BNPL use caused a “permanent increase” in total spending of around $60 a week, primarily concentrated in retail spending.
Most users (82%) cite convenience as the reason they use BNPL, but a significant share, 55%, rely on it to buy items they otherwise couldn’t afford, according to Federal Reserve data.
“(BNPL) is just another thing that makes paying for things more frictionless, and that’s definitely a lesson that we all need to impart on young adults, teenagers, children, as they grow up,” Rathner said.
Even with growing popularity, BNPL remains a sliver of the much larger credit card market. In 2022, the six largest BNPL providers originated roughly $34 billion in loans, about 1% of total credit card spending that year.
Rossman said he’s cautiously optimistic from a business standpoint and is surprised how few people are falling behind on their BNPL payments.
“A lot of people have been saying for a long time, this is a problem waiting to happen, and yet, year after year, quarter after quarter, buy now, pay later, delinquencies are really not bad,” he said.
A January CFPB report found that BNPL default rates are much lower than those on credit cards, likely because payments are often made automatically. Still, the data is hard to track, since most BNPL loans historically haven’t been reported to credit agencies. In effect, Americans may be racking up “phantom debt.”
Rossman is more skeptical of BNPL from a consumer standpoint and said a smart business model isn’t always in the best interest of shoppers.
“If you’re among those who can pay your bills off right away, you should use credit cards for the rewards and buyer protections,” he concluded.
