Concerns about customers taking on more debt are rising as more Americans use “buy now, pay later” programmes to buy necessities like food.
Instalment-pay systems like Klarna and Afterpay provide short-term, interest-free loans to cover purchases, but the penalties for making late payments may be severe, and some people are concerned that its simplicity may tempt customers into risky debt.
According to GlobalData research cited by the New York Times, $45.9 billion in online pay-later transactions were performed in 2021, a substantial rise from $15.3 billion the year before.
About 6% of transactions were made for food last year, but this seems to be a significant contributor to the sector’s spectacular expansion as the rising cost of groceries in the US increases the allure of postponed payments.
How the top pay-later companies compare
Klarna
Plans for payments: Pay in 30 days or four equal instalments with no interest. For bigger goods, pay over 6 to 24 months with interest.
Up to $7 in late fees, but no more than 25% of the initial purchase
Afterpay
Plans for payments: Pay in four interest-free instalments.
Up to $8 in late fees, but no more than 25% of the initial purchase
Affirm
Payment options include four interest-free payments or six to twelve months of interest.
Zero late fines
For instance, Sweden-based Klarna stated that more than half of the top 100 products bought via the app were groceries or home goods.
According to Zip, an Australian-based startup, US grocery sales are up 95%, while restaurant transactions are up 64%.
One of the food companies that works with Zip is Chipotle, which enables hungry Americans to pay 25% in advance for a burrito and make the remainder payments over the course of six weeks.
Supporters of the buy now pay later (BNPL) sector claim that it provides a consumer-friendly, interest-free alternative to credit cards, which may accrue significant interest fees if balances are not paid on time.
‘People have been using their credit cards to buy groceries for years, but they have been hit with astronomical interest rates; Klarna’s interest-free products are a better value alternative designed to stop people from getting into unmanageable debt,’ a spokesperson for the company said in a statement to DailyMail.com.
According to the Klarna statement, “We limit the usage of our services after missed payments and carry out rigorous checks on every transaction to ensure that we only lend to those who can reimburse us since we lose money if clients can’t return.”
“We would be pleased to assist a client get back on track if their financial position changes.”
According to Klarna, the service’s default rates are consistently less than 1%.
However, detractors of the expanding sector claim that since BNPL services don’t charge interest, they are less tightly regulated than credit cards and don’t provide the same level of consumer safeguards.
As the price of necessities rises due to inflation, BNPL services are becoming more popular in the US.
According to Marisabel Torres of the Center for Responsible Lending, “one of the main problems we’ve seen with purchase now pay later is that, typically speaking, no evaluation is performed about whether someone utilising this financing has the capacity to repay that loan.”
In addition, many BNPL businesses impose late penalties, which are greater than the typical interest rate on credit cards even though they don’t charge interest and may reach up to 25% of the initial purchase price.
Additionally, late payments might harm a person’s credit rating.
One significant BNPL service, Affirm, claims to evaluate and approve each transaction and does not impose late penalties.
An Affirm representative told DailyMail.com, “This is fundamentally different from credit cards that have a line of rolling credit and generate money from clients even when they are stuck in a maelstrom of revolving debt.”
Our success, the representative said, “depends on customers properly managing their money since we don’t impose any late or hidden costs.”
However, a July assessment from Fitch Ratings indicated that over 41% of applicants had a bad credit history and that BNPL users on average tend to carry more debt than the typical American.
BNPL services are already commonplace in Australia, where they are referred to as “pay in for.”
However, their increase in the US coincides with rising prices for necessities, with the cost of food rising a record 13.1 percent from a year earlier in July.
The sector has come under regulatory attention in the UK; last month, the financial authority there ordered BNPL businesses to explain to consumers the costs of late payments.