Skip to main content

Buy now, pay later finance sees 2 in 3 Americans spend more than they can afford

Buy now, pay later finance sees 2 in 3 Americans spend more than they can afford
(Image credit: Getty)

American consumers have been reminded of the potential hazards of “buy now, pay later” financing after 2 in 3 shoppers said such loan agreements had led to them spending more on a purchase than they intended. 

A new LendingTree survey also found that around 7 in 10 buy now, pay later users had ended up being charged interest or fees for missed payments, as the impulsiveness of their purchases caught up with them. 

What are people buying? 

Commonly advertised at checkouts when shopping online and in-store, buy now, pay later finance allows shoppers to spread the cost of significant purchases into multiple smaller payments through a loan or instalment agreement. When used sensibly, buy now, pay later can prove extremely useful in allowing people to buy the essential items that they need - such as when buying a refrigerator on finance or getting a new mattress on finance - if they don’t have all of the funds required immediately to hand. 

Worryingly, however, the survey found that more than 1 in 3 people are now using buy now, pay later to cover the cost of discretionary purchases and luxury spending that they normally wouldn’t be able to afford. Clothing (38%), shoes (34%) and jewelry (29%) currently the top items that Americans are buying in this way, while nearly 70% of those who have used a buy now, pay later service admitted doing so to purchase a designer item.

Buy now, pay later finance sees 2 in 3 Americans spend more than they can afford

(Image credit: Getty)

Generation gap 

Perhaps unsurprisingly, buy now, pay later is most popular among younger shoppers, with 59% of Gen Z shoppers (ages 18 to 24) and 47% of millennials (ages 25 to 40) having used this type of finance, compared with just 28% of Gen X shoppers (ages 41 to 55) and 9% of baby boomers (ages 56 to 75).

Noting that younger consumers are less likely to view buy now, pay later agreements as a form of debt, and are also more leery of using credit cards, LendingTree Chief Credit Analyst Matt Schulz isn’t shocked by the differing generational attitudes to such arrangements, but warns: 

“We’ve seen that people tend to overspend with these loans, and Gen Z and millennials are likely to have far smaller financial margins for error than Gen X and boomers, so they’re taking a bit more of a risk.”

Is buy now, pay later a good idea?

As already mentioned, buy now, pay later finance can be a good payment option if thought about carefully and managed properly. As with any type of loan, that means being fully aware of the terms you are entering into and the interest rate that you’ll pay. That way, you’ll also be able to make an informed judgement on whether the payments you’ll need to make are affordable, and won’t leave you requiring the services of the best debt consolidation companies in six months’ time. 

Buy now, pay later finance sees 2 in 3 Americans spend more than they can afford

(Image credit: Getty)

Unfortunately, 31% of those surveyed who entered a buy now, pay later agreement didn’t know what the interest rate and fees would be before agreeing to finance their purchase, and 1 in 10 are still completely unaware of their interest rate even as they’re making payments.

Unsurprisingly, the majority of shoppers who use buy now, pay later financing therefore currently end up being penalised in some way, with 31% being charged a late fee, 23% being charged interest, and 18% being charged both at some point in the past. What a lot of people also fail to realise is that many buy now, pay later loans must be repaid every two weeks rather than once a month, which makes it easier to miss payments.

Knowing the interest rate you’re being asked to pay will also help you compare with other lending options such as the best personal loans online. According to the survey, 12% of buy now, pay later borrowers enjoyed a 0% interest rate deal, and 18% paid less than 10%. However, a quarter (25%) of users admitted they had signed up to a deal charging 10-15%, and a further 20% were paying 15-20%. At the very highest end, and being charged rates far beyond typical loan terms, 8% paid 20-25%, and 7% were paying 25% or more.   

Tim Leonard

With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.