Most consumers aren't sold on the benefits of buy now, pay later: Report

With their backs against the wall regarding rising costs, more consumers are reluctantly opting to use buy now, pay later (BNPL) as a financing alternative, according to a recent J.D. Power report. (iStock)

A growing number of consumers struggling to make ends meet are reluctantly turning to buy now, pay later (BNPL) services as a financing alternative, according to a recent report.

Overall, 80% of consumers said they know about BNPL products and 34% have used a BNPL program in the past 90 days, according to the J.D. Power report. Fifty-five percent of Americans that felt financially overextended and 30% of customers that have healthy financial situations are among the biggest users of BNPL, according to the report.

Of the 80% of Americans aware of BNPL, 60% said the option is helpful, according to the survey. However, 64% don't believe using the option improved their financial situation.

BNPL providers partner with retailers to allow shoppers to split the cost of their online purchases into multiple installments at checkout. Part of the appeal is that the installment payments, which typically begin within a few weeks of the purchase, are interest-free. However, missed payments can result in late fees and other penalties.

"Whether the culprit is a steady diet of ominous news about the recently resolved debt ceiling crisis or the persistent (albeit improving) presence of inflation, customers are back in the doldrums about their finances," J.D. Power said. "Customer satisfaction with their financial condition declined to levels not observed since December 2022, even as financial health scores remain steady.

"Against this backdrop, customers have become more receptive to alternative loan programs, with BNPL options quickly gaining acceptance," J.D. Power continued. "Interestingly, though, customers are turning to BNPL even as they believe it to be contrary to their own self-interests."

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Lenders becoming more selective on who qualifies for BNPL

BNPL loans are easier to get approved for when compared to traditional credit cards. However, there are signs emerging that BNPL providers are becoming more selective on who they offer these zero percent interest rate loans to as lenders struggle to turn a profit in the current economic environment, according to a recent Wall Street Journal report.

"The BNPL space is slowing down to reflect more normalized conditions as opposed to the frothiness of the last decade, which was fueled by government liquidity injections right to the consumer and artificially depressed interest rates," Kafene CEO and Co-Founder Neal Desai said. "As those conditions unwind, the cost of capital increases (which puts pressure on margins), and consumers suffer more financial stress (which drives higher losses).

"The primary response to these conditions is for lenders to be more selective on who they approve and only approve the group of consumers that is least likely to default," Desai continued. "The hurdle is higher than it used to be, and the pool of qualified consumers is smaller."

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Americans' credit card debt is ballooning

Credit card balances remained near record highs at $917 billion in the first quarter of 2023, according to a TransUnion report. That's an increase of almost 20% over last year, according to the report. Moreover, the average balance per consumer grew 14.4% year-over-year to $5,733.

Balances for unsecured personal loans rose 26.3% year-over-year in the first quarter of 2023 to register a new high of $225 billion, according to the TransUnion report. The average loan amount per borrower rose to $11,281 from $9,896 the year before.

"We are seeing more of a shift back over to credit cards within a certain age range as they see more value from reward credit cards than a soon-to-be credit checked and interest-based BNPL product," Finty Co-Founder and Managing Partner Andrew Boyd said.

If you are struggling to pay off debt, you could consider using a personal loan to consolidate your payments at a lower interest rate, saving you money each month. Visit Credible to find your personalized interest rate without affecting your credit score.

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