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

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This is the Daily. As American struggle with rising costs just about everywhere, they're increasingly turning to a new form of credit by now pay later loans. Those loans have exploded since the pandemic. In part, because they're easier to get and often cheaper than credit cards.

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

Stacey, 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 by 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 that 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, OK, 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 upfront 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 the 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 straight forward. 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 is 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.

“If you want to check out, tap and pay and go.”

They are starting to offer loans for other sorts of more recurring expenses and people's lives. So they've sort of morphed from this really quick easy online check out thing. To be in 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.

Why does that matter that so many people are turning to these loans?

Certainly people have always used 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. 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 by now pay later loans say they couldn't make the purchase without them. 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 two 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.

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 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 cost.

You can also kind of entice you to buy something that might be a little more of a splurge. You're scrolling, you 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 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, nonstop, 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 influence or culture. Hi guys, so I wanted to move a everything I bought this week video. People are looking on Instagram and TikTok.

So I did a thing spread the 190 poundable chain.

You would have people sort of bragging about hey, I used Clarena and I went on a shopping spray and here's what I got.

I did a little stuff for a order. I paid for everything through Clarena because that way the became in the Zeitgeist and kind of normalized that this was a way of paying for things you might want to go purchase. Girl map is when you use after pay for literally everything. If you have no money, but want some clothes just like it on the Clarena. Life is too short to not experiencing because you don't have them any right now. They be pretty known to pay me a 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.”

Check out and things like that. I used Clarena to buy my groceries from Aldi and this is everything that I've got. Pay your rent, pay your car note. I have gotten my car fixed on a firm and Clarena. Groceries are expensive, but I got all of this today because I used Clarena.

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 a firm 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 when analyst was referring to this is 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 consumers digital wallet. And you 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 are 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 the borrow might be five, ten 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 a thousand dollars for rent and stretch it out for a couple weeks, you might pay twenty five dollars in fees to do that. That sounds like a kind of low fee overall.

That's part of the selling point.

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 a 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. And then suddenly you're seeing, oh my god, every couple days, money is tapping 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 poll. 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. So every lender is kind of making their own decisions and lending you money, and doesn't necessarily know what you've got extended with other lenders. 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 goodbye without these loans and they are constantly having to rebarrow and pay down and rebarrow again and again and again.

Similar to what would happen with pay day loans. I've talked to a lot of people who find that that's the case. For them, it can become this real financial trap where it's impossible to get out. We'll be right back. I'm David Sanger. I cover the White House and National Security if in New York Times.

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Stacey, you said you've been talking to borrowers who've been taking out these loans. Talk to me about what exactly have been telling you about their experience. I am working at an article about the rising use of pineapple. So I spoke to a woman in Baltimore named Ashley Reed. She's an 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 by mail paid later product for quite some time.

Her story really stuck out to me as she kind of walked me through how she uses these in her monthly budget.

At first, I was just using for my small purchases. If I wanted an outfit or something like that, and she was using by now pay later loans at first, just for little online splurges.

My mom had a spring and you were gone. That changed a couple years ago when her mom had a medical emergency. And a whole bunch of expenses came with that. 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 financial pay later stuff because. And suddenly these apps started to come away to make her everyday bills.

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 for at times with awful stress. We have to make this payment.

I can't relate because, you know, 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 rebarrow 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 barrow again until you're paid up. So yeah, I feel like I'm constantly in like the survival mode.

“And how does she think about the decisions she's had to make?”

How is she's gotten to this point? Is 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. It's hard to see another option for her. I mean, even with all of the works she's doing, she's making a fairly modest five figure income.

Right now, like a lot of people, she's really stretched. So being 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 experiences?

“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 and it totally, 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.

American spend about 3 trillion a year on credit cards right now by now paylators 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 and 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, Stacey, 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 are affluent enough to pay them off being used for online supporters 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 extent 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 in how much people are struggling and that's where the growth of these loans is kind of raising concerns.

Is 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.

And his response has been to say, well, look, they're 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.”

Right, there's 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 to 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. 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, it sounds like a recognition that the use of these things is just not a good sign about where we're 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 usage is rising so much is pretty much a sign that people are really struggling. We'll stay see. Thanks for coming on the show. Thanks for having me. We'll be right back. Here's what else you need to know today. On Sunday, an Amazon cargo jet ran off the runway at Miami International Airport and struck two vehicles killing five people on the ground and injuring five more. Only two people were aboard the cargo plane, a pilot and a co pilot and they both survived. The plane crashed into a van carrying workers for a cleaning company contracted to the airlines and 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 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 party in Germany known as the AFD won a decisive victory in a crucial state election on Sunday, sending shock waves through the country's political system.”

The AFD tapped into voter frustration on a wide range of economic and social issues to win about 44% of the vote in the eastern state of Saxony and Hald.

But the party fell short of the absolute majority needed to govern alone and form the first far right state government in Germany since the Nazi era.

Germany's domestic intelligence agency has designated the AFD as a suspected extremist group and some of the party's leaders have downplayed the Holocaust and adopted Nazi slogans. The party could still assume power in the state, depending on negotiations among rival parties in the coming weeks. Finally, after Lindsey 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 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.

The mistrial came after a grueling seven days and nearly 40 hours of deliberations by the jurors and multiple failed attempts by the judge to get them to a unanimous decision.

In the end, 11 of the 12 jurors appeared to agree that Clancy shouldn't be held guilty of first-degree murder charges, but one juror held out, leading to a deadlock that ultimately couldn't be broken.

Today's episode was produced by Diana Win and Jack Disadoro, with help from Olivia Nath. It was edited by MJ Davis-Lin and Lisa Chow, contains music by Marion Lizano, Dan Powell, and Diane Wall, and was engineered by Alyssa Moxley. Our theme music is by Wonderland.

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