A few years ago, Tiffany Nguyen was a student with her first part-time job, earning her first paychecks and making her first purchases on Klarna. “It was kind of freeing for me as a student,” being able to buy things on what once would have been called credit. Except she didn’t have credit.
For Nguyen, who graduates from Metropolitan State University of Denver this month with a Communication Studies degree, and for countless young adults like her, that’s part of the attraction of buy now, pay later apps: All the instant gratification of a credit card with none of the fees and, at least initially, none of the interest.
“The huge hook is that you pay no interest,” Nguyen said. “That got to me especially as a student on a budget,” she said. She went on a bit of a spree, buying makeup and clothes, mostly.
Practically unheard of a decade ago, BNPL services are soaring in popularity. Estimates of the number of Americans using them range from around 12% up to 60%. More consistent are estimates of who’s using the apps: People under 30. As many as 64% of Gen Zers have used the services.
Along with instant consumer gratification, young users like the fact that they can buy on credit, despite often not having a credit history yet. It probably doesn’t hurt that many apps have zippy, carefree names, like Sezzle, Uplift and Zip.
They also pop up on sites students like her tend to shop on, Nguyen said.
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Basically, buy now, pay later is a short-term, largely interest-free loan that borrowers pay off over time, said MSU Denver Finance lecturer Austin Elsey. The sellers get their money up front, courtesy of the BNPL provider. Then, most BNPL services automatically deduct a payment — once a month, or more frequently, depending on the size of the debt — from the borrower’s bank account. Some BNPLs allow borrowers to pay on their own.
According to financial services company The Motley Fool, 32% of 18- to 29-year-olds have missed a BNPL payment, compared with 12% of adults 60 and older. (The report did not specify whether those who missed payments were using BNPL services that didn’t automatically deduct payments or whether they didn’t have enough money in their accounts to cover the payments. But unlike many young people with big consumer appetites and small budgets, Nguyen said, “I always kept up with payments.”
For holiday shoppers, BNPL apps increasingly act as Santa’s little helper. Use of the services hit an all-time high this Cyber Monday, hitting $1.03 billion in online spending, up 4.2% from last year, according to Adobe Digital Insights. Last year, A, the services financed $18.2 billion in holiday purchases, which amounts to about 7.5% of holiday spending, according to Adobe Digital Insights. That’s up from $14.5 billion just two years earlier.
All that worries some financial observers. But Elsey said if people are using the services as intended, consumers should be OK. “As intended,” he said, means “unexpected but necessary expenses. If you have a flat tire on the way to work but don’t have $250 for repairs.”
That’s how Nguyen uses the services now — on the rare occasions when she does use them. She recently used one to book a postgraduation trip to Southeast Asia.
Unfortunately, Elsey said, that’s not how everyone uses BNPL services. “A Door Dash delivery of $15 probably shouldn’t be on a payment plan. I think that’s the biggest concern I’ve seen is how frequently it’s used for those small-money purchases.”
For Nguyen, all that spending didn’t add up to a sustainable habit. “I had to stop using it because I became like a compulsive buyer and half my paycheck was going to things I didn’t really need,” Nguyen said.
She said that if more young adults were taught financial literacy — she took an elective course on the topic in high school — they might better understand the risks of amassing debt.
Bottom line, Elsey said, “If it’s a choice between a BNPL and a payday loan for an emergency expense, then yes, BNPL is the better choice.”
But for those who do take out these interest-free loans, he said, “Make sure you’re tracking them and not putting yourself underwater.”
Learn about Finance programs at MSU Denver.
