About two months ago, Israel Conerly, a part-time grocery worker in Flint, Michigan, was in the checkout line at Walmart, staring down a $400 bill. Conerly had recently lost her full-time job as a recruiter. And with a lot less money coming in, $400 was a lot to handle all at once. So she paid for her purchases with Klarna, a buy-now, pay-later app that divided the Walmart charge into four payments, paid every two weeks.
“It definitely helps me a lot with bills instead of taking it all out at once,” she said. “I don’t have to use my credit card. I would rather not be in debt with people.”
When Conerly, 24, began using Klarna last year, it was mainly for extras like concert tickets, airline flights and pricey Uber rides. But as prices have climbed and her income has fallen, Conerly is increasingly turning to buy now, pay later apps to cover necessities like food.
“What we’re seeing in our data is that people are probably having a harder time making the purchases that they were making in the past,” said Colleen McCreary, consumer financial advocate for Credit Karma, a personal finance company.
A survey by the company last month found that 61 percent of consumers nationally have used buy now, pay later apps for groceries, household supplies and other staples, up from 44 percent in September. Half of those shoppers also said they have relied more often on such services in the past six months, with 89 percent of users paying off one to three purchases at a time.
The popularity of buy now, pay later apps, including Affirm, Afterpay and Klarna, was on the rise before the pandemic. But with the boom in online shopping over the past two years, the number of plans has soared, and many thousands of products have become eligible, from a $5,000 couch to a $50 tank of gas. In December alone, downloads for the top four apps exceeded 3 million, a 20 percent increase over the same month in 2020, according to research from Bank of America.
Yet as more shoppers turn to the services to manage their everyday expenses, personal finance experts and consumer advocates are raising concerns that buy now, pay later plans may be introducing a new era of unchecked credit.
“We’re certainly seeing that, with record high inflation, people are needing to use this to pay their bills and get by, which is a little concerning,” McCreary said.
Ashley Osterman, a customer service worker in Minneapolis, started using buy now, pay later apps during the pandemic for extras like gardening tools and soil to spruce up her lawn. But as prices for food and other basics have been climbing, she’s also used them to buy products like toilet paper and paper towels in bulk at warehouse stores, including Costco and Sam’s Club.
“I just wanted to stretch out the payments to feel a little bit more comfortable financially,” she said.
Osterman, 35, works as a contractor and can’t always predict how many hours she’ll get in a week or a month. She also has a young daughter. She said using a payment app has also allowed her to manage her expenses between jobs and still afford the special things.
“I’d still like to be able to go out and do things or do surprise activities with my daughter, even for myself, and just get a break or do something different,” she said. “Just having that option there makes a big difference.”
It’s an increasingly easy option to exercise. Unlike credit cards, buy now, pay later plans do not require hard credit checks to qualify, which would be recorded on a credit report. A few of the plans, including Affirm, which has 11 million users, may charge interest, but the majority charge fees. And they can pile up if you fall behind on payments. Klarna, for example, charges a $7 late fee or at most 25 percent of the balance if it can’t collect payment within two attempts from a linked bank or checking account, which could also trigger a hefty fee from the bank for insufficient funds.
Afterpay charges similar late fees, and “if consumers do have any trouble on repayment, we will pause their ability to use the service until they can repay that debt so that they don’t get themselves into perpetual debt,” said Zahir Khoja, the general manager of the company’s global platforms and partnerships. “So it’s very different from traditional credit, which would love for you to pay $10 a month for the rest of your life.”
Buy now, pay later plans are also different from traditional credit cards in that most don’t report to credit agencies, which means steady payment records won’t contribute to better credit scores.
Industry experts attribute the exponential growth in buy now, pay later apps to a generation of younger consumers who either witnessed or experienced the Great Recession firsthand, when millions of people lost their homes and their jobs amid crushing debt.
At first, buy now, pay later shoppers were typically high earners who used repayment options to cover fashion, beauty or large travel purchases, said McCreary of Credit Karma. But in recent years, the income range of shoppers has become wider, she said. “It’s becoming more and more a replacement for people who don’t have any other options,” she said. “They’re just grabbing whatever option that they can get at the checkout line to get what they need.”
As inflation surges, the options are growing. Last year, Klarna began accepting payments for gas purchased at Chevron. Sezzle is testing repayment options with the New Jersey-based grocery chain Wakefern, which owns ShopRite and Fairway, and with California Pet Pharmacy. Afterpay says it will soon accept payment for purchases at certain grocery stores.
“Buy now, pay later products are really marketed as low risk, low costs, but they can easily become unaffordable,” said Nadine Chabrier, a senior policy counsel with the Center for Responsible Lending, which is among several consumer groups arguing that such loans amount to debt that should be regulated similarly to credit cards.
The Center for Responsible Lending argued last month in a letter to the Consumer Financial Protection Bureau that buy now, pay later apps should abide by “bare minimum standards” required of credit cards. In nearly all states, the apps aren’t required to review a consumer’s credit history or consider their ability to repay the debt, Chabrier said. The plans also need not clearly disclose fees or charges, or offer dispute resolution.
Plans are prevented by law from unfair, deceptive and abusive lending practices. But because they typically offer loans that must be paid in fewer than five installments, they aren’t subject to the Truth in Lending Act, according to a March letter submitted to the Consumer Financial Protection Bureau by nearly two dozen state attorneys general.
Michael Linford, the chief financial officer of Affirm, said the company is an exception. “Affirm has long held that our transactions are loans, and we show Truth in Lending disclosures,” he told a meeting of investors last month. “We think it’s a good thing for the industry and for regulators to ask people to actually underwrite transactions that help keep consumers from being too extended.”
For Israel Conerly, that’s not really a concern right now. She said buy now, pay later has become a regular way to budget her expenses. She uses Klarna often for groceries and plans to tack on gas expenses, along with future vacation costs.
“It’s, like, my money, anyway,” she said. “I guess I’ll splurge on vacation and come back and deal with the consequences later.”
CORRECTION (April 23, 11:30 ET) An earlier version of this article misstated Israel Conerly’s pronouns. Conerly uses she/they pronouns, not they/them pronouns. The article also misstated Affirm’s user base, which is 11 million users, not 7 million. The article also has been updated to clarify that Affirm may charge interest on some loans.