Home Future payments How to buy now, pay later is driving Gen Z into debt

How to buy now, pay later is driving Gen Z into debt


Sarah Pfefferle had already saved $16,000 for her future home at the age of 18. Then she started using buy now, pay later (BNPL) products and “ruined everything”.

In just two months, the Chicago native racked up $5,000 in debt on three of the installment loan companies.

The bloated balances drained much of her savings and prompted her to seek help from a financial adviser. But the damage was done: the case of Mrs. Pfefferle credit score dropped to 580 from 720 after closing his accounts.

Ms Pfefferle, now 21, said her plan to buy a house had been delayed for at least two years. And she fears she can’t get a mortgage.

“I have little or no money saved for emergencies,” she said. “It’s a vicious circle.”

Ms. Pfefferle is not alone.

Australian company Afterpay has popularized the concept of buy now, pay later as a new take on layaway plans with an instant gratification twist. Financial products typically allow consumers to pay for their purchases in four instalments, with the promise of low or no fees, no interest and fast credit approvals.

This appealed to younger consumers with little credit history, who saw BNPL as an alternative to credit cards for the TikTok generation.

Pioneering companies including Afterpay, Klarna and Affirm launched with hip apparel retailers, struck brand deals with social media influencers and quickly became ubiquitous across apps and online payments.

They make most of their money by charging merchants a fee each time a consumer uses the product at checkout.

Short-term loans grew in popularity during the Covid-19 pandemic, thanks to consumers having extra cash on hand and limiting themselves to shopping online.

Five major BNPL companies issued 180 million loans totaling $24.2 billion in 2021, nearly 10 times more than in 2019, according to a report by the Consumer Financial Protection Bureau (CFPB) in the United States.

The promise of interest-free payments has made BNPL products particularly appealing to credit card-wary Generation Z.

However, BNPL is “only free when you follow all the rules,” said Ed Mierzwinski, senior director of the US Public Interest Research Group.

BNPL companies have been plagued by delinquency this year as inflation bites.

The CFPB found that younger borrowers are more likely to have loans in “derogatory status,” meaning they are either in default or sent to a third-party debt collector.

About 11% of borrowers paid at least one late fee in 2021, an increase from the previous year. And 18% of consumers aged 18 to 29 fell behind in their payments in 2021, according to a Federal Reserve report.

“Marketing here is relying on a younger spender, perhaps less financially sophisticated, because he hasn’t been in the financial market for that long,” Mierzwinski said.

In emailed statements, Afterpay, Klarna and Affirm all said they offered more safeguards to consumers than credit cards and stressed that they did not charge interest and did not charge late fees or did not cap them.

For Gabrielle, who asked that her surname be withheld, she didn’t feel like she was spending the money because her BNPL payments hadn’t been due for weeks. And the more she spent, the more credit she got.

More than a year later, the 19-year-old found himself with a pile of new clothes, make-up and $3,500 in debt with balances on multiple BNPL apps.

She was finally able to pay off her balances in April after asking for help on a Reddit forum, where many users said BNPL apps were fueling their shopping addiction.

For some, falling behind on BNPL payments could have lasting consequences.

Briana Gordley, 24, said she didn’t understand BNPL’s hidden pitfalls when she first encountered an Afterpay advert at clothing retailer Forever 21 in 2016.

Paying for her own college education and rejected by credit card providers, the then freshman thought the financial offer was a safe way to pay for things she couldn’t afford with her job. part time.

Accountability and responsibility should be a two-way street between consumers and businesses

Briana Gordley, consumer

Just 18 months later, the Texas native had spent $1,500 on three platforms, and three of her loans had been sent to collections. She was forced to turn to her parents for help.

And even then, it took him two years to finally set up a savings account and start paying off his student loans.

Although Ms Gordley’s late payments have not affected her credit rating, it may not be the case for borrowers in the future.

Major credit bureaus like Equifax and Experian have announced they will begin including BNPL purchases in consumer credit reports, although not all lenders report data to them yet.

Loans sent to debt collectors can also be flagged, which can hurt consumer credit scores.

Ms Gordley told the Senate Banking Committee in September that BNPL targets young borrowers who are only learning to manage their own finances, and said the products border on “predation” without strong disclosures and consumer protections.

“I understand and believe in personal responsibility and accountability for the choices I’ve made,” Ms Gordley said. “But accountability and responsibility should be a two-way street between consumers and businesses.”

Updated: October 30, 2022, 04:00