Gen Z is drowning in debt as buy-now-pay-later services skyrocket

Adobe Analytics projects that holiday shoppers will spend 11.4% more using buy now, pay later (BNPL) services compared to last year. The firm estimates that purchases through BNPL will reach $18.5 billion from Nov. 1 to Dec. 31, including $993 million on Cyber Monday alone.

BNPL services are especially attractive to consumers with low credit scores or no credit history, such as younger shoppers. Unlike credit cards, most BNPL providers conduct only soft credit checks and typically do not report loan or payment history to credit bureaus.

This holiday season, consumers using BNPL plans may feel more secure thanks to enhanced regulations. In May, the Consumer Financial Protection Bureau (CFPB) required BNPL companies to comply with rules governing traditional credit, including provisions for refunds and transaction disputes.

To use a BNPL plan, shoppers provide bank account details or a debit or credit card and agree to pay in installments, often over eight weeks or more. These loans are marketed as low or no interest, with fees generally limited to late payments. Leading BNPL companies include Klarna, Afterpay, and Affirm.

However, consumer advocates caution against funding BNPL purchases with credit cards. Doing so can lead to additional interest on the credit card balance if it’s not paid in full, compounding any fees or penalties from the BNPL loan. Experts recommend avoiding credit cards for BNPL payments to prevent these extra costs.

Watchdogs also warn that BNPL can encourage overspending. Paying in installments may create a perception of having more money available for other purchases. Additionally, managing payments across multiple BNPL services can become complicated, as there is no centralized reporting like a credit card statement.

“Buy now, pay later can be a useful tool for purchases you’re already planning to make,” said Mark Elliott, chief customer officer at LendingClub. “The challenge is that it often drives overspending.”

Retailers benefit from this consumer behavior. Offering BNPL has been shown to increase the likelihood of larger purchases or converting browsing into sales. Research cited by the Federal Reserve Bank of New York found that customers spend 20% more when BNPL is available.

“The rising cost of living and inflation have made more people dependent on revolving credit,” Elliott noted. “With BNPL, people often don’t view it as debt, but it is.”

Consumers who miss BNPL payments risk fees, interest, and potentially losing access to these services in the future.