‘Buy Now, Pay Later’: A New Wave of Consumer Debt

From The New York Times, I'm Natalie. Kitroeff. This is The Daily. >> [music]. [music]. >> As Americans struggle with rising costs. just about everywhere, [music]. they're increasingly turning to a new. form of credit, buy now, pay later. [music] loans. Those loans have exploded since the. pandemic, in part because they're easier. to get and often cheaper [music] than. credit cards.

And now, people are relying on them for. everything [music] from groceries to. rent. >> [music]. >> Today, my colleague Stacy Cowley. explains the draw and the hidden risks. of buy now, pay later loans. And what their rise says about the state. [music] of the American consumer. >> [music]. >> It's Tuesday, September 8th.

>> [music]. >> Stacy, welcome back to the show. I love. having you here. >> Thanks for having me back to talk about. debt again. >> Yes, the debt that we are here to talk. about are these buy now, pay later. loans. And I want to start by asking you. to explain at a really high level what. these loans are and why they've become. so popular. >> So, these are very short-term. installment loans that you can use when. you're purchasing something at a retail.

checkout or online or just in your daily. shopping needs. And they are typically very quick and. easy to get. You can usually get. approved for one within minutes. And. they let you buy something and space out. your payment for it over time. So, let's. say you're going to buy a new pair of. shoes. You can click a button and say, "Okay, I'm going to do a six-week loan. and I will every two weeks pay a third. of this and I will have it paid off in. six weeks rather than paying for all of. it up front right now. You can also. download an app. When I was reporting.

this story, I went and downloaded some. I signed up with a firm. Five minutes. later, I had a $6,000 credit line and a. whole list of merchants I could go spend. it at. >> Right. I have seen these in my online. shopping being offered to me. They seem really easy, straightforward. You just click a thing and there you. are. You have credit. >> And that's by design. They're intended. to be really fast, really easy, to feel. kind of transparent. You can see the. terms, you can click, boom, off you go. So, that is the intention to make these.

really easy to obtain. And what's been. happening over the last few years and. starting to accelerate is they're moving. into the physical world. A lot of these. vendors now offer payment cards where. you could use it at a checkout, tap and. pay and go. They are starting to offer. loans for other sorts of more recurring. expenses in people's lives. So, they've. sort of morphed from this really quick, easy, online checkout thing to being a. more generally available and broad-based. form of credit for your everyday life. And we know that roughly half of.

Americans have used a loan like this at. some point in the last few years and. around 15 to 25% of Americans are using. them really regularly. >> And why does that matter that so many. people are turning to these loans? >> Certainly people have always used, you. know, credit cards and things like that. for consumer purchases. So, the idea. that you're having to borrow to finance. your daily needs, that's not new. Right. What's drawing attention here with this. is both how easy and frictionless these. are to obtain. And also that the usage patterns tend to.

be most heavily used by people who are. really on the financial margins. These. are often people who've maxed out their. credit cards, who don't qualify for. credit cards, people are struggling to. keep up with their bills and their. debts. So, that's always a concern when. you see people borrowing things that. they may not be able to repay. About. half the people who use buy now, pay. later loans say they couldn't make the. purchase without them. >> Mhm. >> The other thing that's drawing attention. is just how quickly these are growing. They're growing by about double-digit. growth rates every year. Last year,

Americans spent about $160 billion. through these loans, which is about. twice what they'd spent 2 years earlier. >> Okay, so really rapid growth in a form. of credit that is going to people who. may not be qualifying for other types of. loans or may have maxed out their credit. cards. How did we get to this point where these. loans have become so ubiquitous, where. you can't really check out of any online. store without being offered them? >> So, these loans really started about 15. or so years ago in Europe and Australia.

That's where they kind of started to. take off. We saw them move into the. United States, you know, a decade or so. ago, but the pandemic was really the. moment where they skyrocket. Basically, what happened there is you. had a lot of people sitting at home. doing a lot of online shopping. There. was real consumer demands, and these. became a very easy way for merchants to. put them at the checkout counter on. their online websites and say, "Hey, you. can quickly get credit and finance this. purchase.". >> Can you just explain that? I know the.

pandemic was an economically difficult. period for a lot of people, but. >> [music]. >> the US government was also working to. keep people afloat with these pandemic. checks, and a lot of people did have. cash on hand. So, why were they turning. to these loans? >> Right. It was a moment when people were. sort of unusually flush compared to how. they usually are in America. What was. appealing about these loans is they sort. of facilitated impulse purchases, and. sometimes they were used by people who. just wanted to use them for convenience. If you're going to go buy a couch for. your house in the pandemic and you have. the option of stretching the payment out.

for a few weeks or months, sure, why. not? Especially when they started, those. retail merchant loans, they often came. with no fee. The merchant was paying the. [music] cost. Can also kind of entice. you to buy something that might be a. little more of a splurge. You're. scrolling, you [music] see a cool. outfit, you see a cool pair of shoes. This makes it really easy to sort of. impulse go, yes, I'm going [music] to. buy this. And that's why the merchants. offered them. For them, it's a way to. make a sale you might not otherwise. make. >> So, at this point in the history, it. sounds like the massive growth in the.

loans is being driven by a particular. consumer culture that took over when we. were all staring at our phones non-stop. trying to keep up with the Joneses on. Instagram and TikTok and such. >> Totally. And that moment also coincided with the. sort of takeoff, really, of influencer. culture. >> Hi guys. So, I wanted to film a. everything I bought this week video. >> People are looking on Instagram and. TikTok. >> So, I did a thing. Spent 190 pound on. Shein.

>> You would have people sort of bragging. about, hey, I use Klarna. I went on a. shopping spree and here's what I got. >> I did a little Sephora order. I paid for. everything through Klarna [music]. because that way you. >> It became in the zeitgeist and kind of. normalized that this was a way of paying. for [music] things you might want to go. purchase. >> Girl math is when you use Afterpay for. literally everything. >> If you have no money, but want some. clothes, just smack it on the Klarna. >> Life is too short to not experience. thing because you don't have the money. right now. Baby, put it on the payment. plan.

>> And then since then, that's when they. started their sort of morph out into a. much broader pool of retail options and. showing up at your grocery store. checkout and things like that. >> I used Klarna to buy my groceries from. Aldi and this is everything that I got. >> Pay your rent, pay your car note. >> gotten my car fixed on Affirm and. Klarna. >> Groceries are expensive, but I got all. of this today because I used Klarna. >> And that's been the thing that's been. changing, especially this year. Not only.

are people really starting to use these. loans for more everyday essentials, the. vendors are leaning into it. So, a lot. of them have started specifically. targeting and offering products in that. space. For one example, Flex is an app. that people have used for years to pay. for rent. That is their specific market. They do about $2 billion a month in rent. loans. >> Wow. >> This year, they started deliberately. expanding into sort of a broader set of. recurring monthly expenses, like. utilities and auto loans. We've seen. other lenders sort of following that. same path. So, Affirm is one that people.

might have used online. It's pretty. popular retail checkout app. They this. year started offering rent loans. They. said they were responding to what they. saw as user demand for that more. everyday essential. >> So, it's expanded far beyond influencer. culture. People are using it on basic. necessities. >> Yeah. One person I talked to, one. analyst was referring to this as the new. working capital for the working class. Like this is really something that. for people who are really struggling to. make ends meet, these are increasingly.

becoming a tool they go to. And other. people who might have some more. discretionary income and discretionary. credit options, they too are starting to. experiment with these more and make them. sort of more regular part of an everyday. consumer's digital wallet. >> And you've started to do this, but just. walk me through how the companies that. offer these loans make money off them. >> When they started to really take off, it. was usually the merchants paying the. fees. Right. But there's only two places. for these companies to make their money. It's the merchants or the consumers. And.

as people are starting to use them for. more everyday things, more often than. not, it's the consumer paying the fees. now. >> What does that look like exactly? >> So, typically, if you're going to use. one of these, you're going to pay a. small fee to borrow. Might be 5, 10. bucks to take out the loan. Some. processing fees on top of it, things. like that. Some of them have. subscription fees. But generally. speaking, if you're going to borrow. $1,000 for rent and stretch it out for a. couple weeks, you might pay $25 in fees. to do that. >> That sounds like a kind of low fee.

overall. I guess I'm just wondering, how. is this form of a loan different from a. credit card, for example. >> That's one of the selling points. Since. these are typically small dollar loans, the fees are typically also small. dollar, and they're very concrete. It's. very clear in dollars and cents what. you're going to be paying. With credit. cards, that's often pretty opaque. You're paying an interest rate, it. changes, it fluctuates, you might pay an. unspecified late fee, and then your rate. might go up. So, for consumers, that can.

feel a lot more. unpredictable than these loans can. The. other selling point is that it's. short-term. These are typically loans. that last a few weeks or few months. So, part of the pitch is, "Hey, you can't. get yourself into a really long-term. debt trap here.". >> Okay, given that, this actually seems. like a pretty good option if you need. help with something like paying your. rent. Is there a catch? Is there something I'm. missing? >> Yep, there's a couple. One thing about these is that to get. one, you typically have to give them. your bank account information or a debit.

card. So, when it's time to pay, they're. just going to reach straight into your. bank account and take the money out. >> Meaning, basically, you're not choosing. when to repay these loans like I am with. my credit card, how much, when. These. companies just reach directly into your. bank account and take that money on. their schedule. >> Yep, on the day the loan is due, it's. coming straight out. Look, if you only. have one loan, you can probably keep. track of when it's due. But, you can get. multiples of these loans, and it's not. uncommon to see people with a dozen or. so loans out there.

>> Mhm. >> And [clears throat] then, suddenly, you're seeing, "Oh my god, every couple. days money's zapping out of my account. I can't keep track of that." And. suddenly, you're getting hit with. overdraft fees and things like that. >> Right. >> So, another catch is that these. companies also typically do what's. called a soft credit check. They're not. doing a hard credit pull. So, the. underwriting for these loans is really. light. And unlike with more traditional. credit, where some credit bureau is. keeping track of everything you owe, that's not happening here. >> Mhm. >> So, every lender is kind of making their. own decisions in lending you money, and.

doesn't necessarily know what you've got. extended with other lenders. >> [music]. >> It can be easy to have them stack up and. it can start to become a real cycle. people get into where they start and. then find that they can't get by without. these loans and they are constantly. having to re-borrow and pay down and. re-borrow again and again and again. [music]. Similar to what would happen with payday. loans. I've talked to a lot of people who find. that that's the case.

For them it can become this real [music]. financial trap where it's impossible to. get out. >> [music]. >> We'll be right back. >> [music]. >> Stacey, you said you've been talking to. borrowers who've been taking out these. loans. Talk to me about what exactly. they've been telling you about their. experience. >> I am working on an article about um the.

rising use of buy now pay later. products. >> So I spoke to a woman in Baltimore named. Ashley Reed. She's a instructional aid. in Baltimore City Schools and she's also. a radiology assistant at a hospital. She's working a job and a half to make. ends meet. >> I have been using buy now pay later. products for quite some time. I want to. say. >> really stuck out to me as she kind of. walked me through how she uses these in. her monthly budget. >> At first I would just use them for like. small purchases. If I wanted an outfit. or something like that and. >> She was using buy now pay later loans at.

first just for a little online splurges. >> later and then my mom had a brain. aneurysm. >> That changed a couple years ago when her. mom had a medical emergency hmm and a. whole bunch of expenses came with that. >> And I wound up like maxing out my credit. cards to um pay for hotel rooms and. ambulance services to get her. transferred back. >> She had to travel to be with her mom in. the hospital. There were lots of things. that weren't being paid for. So she. maxed out all of her credit cards trying. to make this work. >> That's when I really started to depend. on the buy now pay later stuff because.

>> And suddenly these apps started to. become a way to make her everyday bills. And pretty quickly in a matter of. months, it starts to swallow her. And. like a lot of Americans these days, her. income fluctuates. Her teaching job pays. her for 10 months of the year, so in the. summer she's really stretched. And she. has to juggle her bills and prioritize. >> The buy now pay later is helpful but at. times it's also stressful because I have. to make this payment and I can't be late. because.

you know, I I I'm going to need to use. it again. >> So she talked to me about choosing to. sometimes go late on her rent because. her landlord's nice and she knows. they'll be okay with it. And prioritize. paying off her pay later loans because. she needs them to be able to re-borrow. again the next month to buy her. groceries and her basics. >> And she has to stay in good standing. with those companies to keep taking out. those loans. >> Right, because if you are late on a. loan, they will respond by freezing your. credit line. You won't be able to borrow. again until you're paid up. >> So yeah, I I I feel like I'm constantly.

in like this survival mode. >> And how does she think about the. decisions she's had to make, how she's. gotten to this point? >> She said she. would really caution people about. starting to use these apps. >> Don't get dependent on it like I have. gotten myself dependent on it where I. >> It's hard to see another option for her. I mean, even with all of the work she's. doing, she's making a fairly modest. five-figure income. Right now, like a. lot of people, she's really stretched.

The cost of living has gone up so much, it's hard to make ends meet and this. really did become her only way. But. she's also very aware that she's now in. this cycle that's really hard to get out. of. >> And do we know how common this kind of. experience is? I mean, you said I think. 15 to 25% of Americans say they're using. these loans regularly. How many of them. are in situations like this? >> That's one of the challenges here. There. isn't a lot of good data. Anecdotally, there's lots of reports out there about.

people falling into these kinds of. situations, but because these lenders. are typically not reporting to credit. bureaus, it's really hard to know exactly what's. going on in here. These are often loans that are backed by. private credit money, not banks. So, there isn't the same level of regulatory. oversight and monitoring that we have. with other credit products. But, right. now, this whole area is fairly small. compared to, for example, credit cards. Americans spend about 3 trillion a year.

on credit cards. Right now, buy now, pay. later is about 160 billion. So, it's. much smaller in comparison, but because. of how fast it's growing and because. it's really hard to know exactly what's. going on with these loans, there's concern among economists about. when does this become a bigger risk. >> And is there any discussion in. Washington about pushing for regulation. around these? >> In fits and starts. There was starting. to be a move towards that towards the. end of the Biden administration. That.

pretty much stopped with the Trump. administration. There's not a lot of. interest there in more federal financial. regulation. So, we've seen some movement in some. states to try to write their own rules. around this. In some ways, this is. parallel to what happened with the. credit card industry. I mean, in the. early days of that, this was starting to. explode, people started to use them. more, and the regulation caught up. later. >> You know, Stacy, one of the questions I. have about this is that from everything. you've said, it seems like part of the.

risk of these loans is not actually. something that would necessarily be. subject to regulation, which is the way. that they're marketed to consumers and. the way they interact with our. psychology as we go to buy things. Maybe. people have less anxiety about them than. they do about credit card debt. And I'd imagine the concern about that. is that they potentially create a kind. of permission structure for people to.

plunge themselves into more and more. debt without actually being super. conscious of how big a problem it could. be. >> Yeah, that was what struck me in talking. to consumers about this. is that it was one thing when these were. loans for people who were affluent. enough to pay them off, being used for. online splurges and purchases and things. like that. But now, as they become the. thing that so many people are having to. rely on for everyday essentials, this. can sometimes become the only way to.

keep your monthly budget going. I have. talked to consumer advocates who say, "Look, given the options out there, these can be some of the better choices. for people who don't have a lot of other. borrowing options.". But one of the big questions that's. going on around the rapid growth here. is, "To what does this reflect consumer. preference? Are people choosing these. loans because they prefer them to other. forms of borrowing? And to what extent. is it desperation? I mean, one of the. big stories of this year has been. affordability and how much people are. struggling, and that's where the growth.

of these loans is kind of raising. concerns. It's one thing if people are. voluntarily opting for them, it's. different if people are so desperate. that these are the only ways they can. make ends meet.". >> You know, it strikes me that as there's. been all this discussion about the. affordability crisis, Treasury Secretary. Scott Bessent has been asked about, you. know, these consumer surveys showing. that people are growing pessimistic. about what they can afford. And his. response has been to say, "Well, look, their spending tells a different story. Consumer spending is still really.

strong." And that's true. But the growth of these loans, especially for necessities, as you've. described it, that seems to complicate that narrative. >> [snorts]. >> Right. This kind of two ways to look at. that. One is that if consumer spending. is growing because people are feeling. confident, they feel like they can go on. vacation, and they feel comfortable that. they'll be able to pay it off, that's. one thing. But, if borrowing is going up. because people are having to do it to.

pay for their daily needs, that's different. >> [music]. >> And the companies themselves are. acknowledging it. When I talked to an. executive at Flex, I'm going to read you. what he said to me. He said, "We can't. solve income or the price of rent and. affordability. What we can help people. solve is a timing issue. It's harm. reduction.". >> That phrase, harm reduction, [music] it. sounds like a recognition that the use. of these things is just not a good sign. about where we're [music] at with the.

affordability crisis. >> That's how I took it. They can be more. appealing and safer than other options. out there. But, the fact that use is just rising so. much. is pretty much a sign that people are. really struggling. >> [music]. >> Well, Stacy, thanks for coming on the show. >> Thanks for having me.

>> [music]. >> We'll be right back. >> [music]. >> Here's what else you need to know today. On Sunday, an Amazon cargo jet [music]. ran off the runway at Miami. International Airport and struck two. vehicles, killing five people on the. ground [music] and injuring five more. Only two people were aboard the cargo.

plane, a pilot and a co-pilot, [music]. and they both survived. The plane crashed into a van carrying. workers for a cleaning company. contracted to the airlines and [music]. an SUV that had been on a public road. Federal investigators still don't know. the cause of the crash and plan to. review the aircraft's various systems. [music] and flight controls. Thousands. of passengers traveling during the Labor. Day weekend had their flights delayed or. canceled because of the crash.

And a far-right [music]. party in Germany known as the AfD won a. decisive victory in a crucial state. election [music] on Sunday, sending. shockwaves through the country's. political system. The AfD [music] tapped into voter. frustration on a wide range of economic. and social issues to win about 44% of. the vote in the eastern state [music] of. Saxony-Anhalt. But the party fell short of the absolute. majority needed to govern [music] alone.

and form the first far-right state. government in Germany since the Nazi. [music] era. Germany's domestic intelligence agency. has designated the AfD [music] as a. suspected extremist group and some of. the party's leaders have downplayed the. Holocaust and adopted [music] Nazi. slogans. The party could still assume power in. the state depending on negotiations. [music] among rival parties in the. coming weeks. Finally,

after Lindsay [music] Clancy's triple. murder case ended in a mistrial on. Friday, the prosecutor in the case would. not say whether he would retry Clancy. for strangling her three [music] young. children. Clancy had admitted to the killings but. pleaded not guilty by reason of insanity. with her defense arguing that she was. suffering from postpartum psychosis. >> [music]. >> The mistrial came after a grueling 7. days and nearly 40 hours of. deliberations by the jurors. >> [music]. >> and multiple failed attempts by the.

judge to get them to a unanimous. decision. In the end, [music] 11 of the 12 jurors. appeared to agree that Clancy shouldn't. be held guilty [music] of first-degree. murder charges. But one juror held out, leading to a. deadlock that ultimately [music]. couldn't be broken. Today's episode [music] was produced by. Diana Wynn and Jack Disidoro with help. from Olivia Nat. It was edited by M.J.

Davis Lynn and Lisa [music] Chow. Contains music by Marion Lozano, Dan. Powell, and Diane Wong and was. engineered by Alyssa Moxley. [music]. Our theme music is by Wonderly. >> [music]. >> That's it for The Daily. I'm Natalie. Kitroeff. [music]. See you tomorrow.