Buy now, pay later isn’t a boom, it’s a bubble, says a Harvard scholar

Most people love the convenience of buy now, pay later.

Installment payments have exploded since the start of the coronavirus pandemic, along with a general surge in online shopping.

Initially, it made financial sense to spread the cost of a large purchase – such as a Peloton – especially at 0%.

According to Experian, 4 in 5 US consumers use BNPL for everything from clothing to cleaning supplies, and most shoppers said “buy now, pay later” could replace their traditional payment method (likely credit cards).

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“It’s hard to buy anything more without being asked if you want to pay over time,” said Marshall Lux, a fellow at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School.

Today, most consumers see a “buy now, pay later” option when shopping online at retailers like Target, Walmart, and Amazon, and many vendors are also introducing browser extensions that you can download and use with every online purchase. Then there are the apps that allow you to use installment payments even when making a personal purchase – just like you would use Apple Pay.

“Three years ago people were talking about Peloton bikes, now people are buying sneakers, jeans and socks,” Lux said. “When people start buying household goods on credit, that signals a problem.”

When people start buying household goods on credit, it signals a problem.

Marshall Lux

Fellow at the Harvard Kennedy School

Additionally, BNPL’s rapid growth is primarily driven by younger consumers, with two-thirds of BNPL borrowers classified as subprime, Lux noted, making them particularly vulnerable to economic shocks or a potential downturn.

“These are the people who can’t afford to get hurt,” he said.

Additionally, according to a survey by LendingTree, nearly 70% of Pay Now users admit to paying later that they spend more than if they had to pay for everything up front.

In fact, 42% of consumers who took out a buy-now, pay-later loan made a late payment on one of those loans, LendingTree found.

According to a separate poll by survey site Piplsay, Gen Zers are more likely to miss a payment and resort to BNPL for everyday purchases than large items.

Generally, depending on the lender, if you miss a payment, you may incur late fees, deferred interest, or other penalties. (CNBC’s Select has a full summary of fees, APR, whether a credit check is performed, and whether the provider reports to credit scoring companies, in which case late payment could also affect your credit score.)

Although “they don’t come for your sneakers, the fact that you can buy something and not know what will happen if you default — becomes a problem for the average person working from paycheck to paycheck,” Lux said “It feels a bit like the Wild West to me.”

Without much regulatory oversight, the BNPL market is currently in “a legal gray area,” according to Lux.

“Let’s stress test this,” he said. “It has the potential to be a pretty big bubble.”

The Consumer Financial Protection Bureau has launched an investigation into popular “buy now, pay later” schemes.

The financial watchdog said it was particularly concerned about how these programs impact consumer debt accumulation, what consumer protection laws apply and how payment providers collect data.

“Buy now, pay later is the new version of the old layaway plan but with modern, faster twists where the consumer gets the product immediately but also gets the debt immediately,” CFPB Director Rohit Chopra said in a statement.

The CFPB has not yet announced its next steps.

Subscribe to CNBC on YouTube. Buy now, pay later isn’t a boom, it’s a bubble, says a Harvard scholar

Gary B. Graves

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