A newly published report dives into Buy Now, Pay Later (BNPL) borrower trends and reveals they exhibit financial distress. Other trends also indicate that BNPL borrowers likely use different types of credit, like credit cards, personal loans, and student loans. Here’s what you need to know.
What is Buy Now, Pay Later?
Maybe you have heard of companies like Affirm or Afterpay. Companies of the sort offer Buy Now, Pay Later (BNPL) services. BNPL is a form of payment offered to borrowers as installment loans as an alternative to credit cards. This type of borrowing typically does not affect credit scores as qualification for the loan is done through a soft pull. BNPL services may or may not include interest rates and other fees for late or missed payments.
Related Article: Experts Warn of Buy Now, Pay Later (BNPL) Dangers
How Are BNPL Users Exhibiting Financial Distress?
The Consumer Financial Protection Bureau (CFPB) has published a new study highlighting insights from their Making Ends Meet survey. They found BNPL borrowers, on average, are most likely to exhibit financial distress. Some examples of the economic struggles borrowers face stem from debt, revolving credit card balances, credit card delinquencies, and more. These findings were compared to consumers who don’t use BNPL services. Non-borrowers do not exhibit the kinds of financial hardships of BNPL service users.
Other examples of common financial distress among borrowers include the following:
- Having higher credit card debt and utilization rates
- Having a higher likelihood of having an overdraft
- Having a higher possibility of revolving on at least one credit card
- Higher utilization rates of alternative financial services like payday loans that charge high-interest rates.
“A common misconception of Buy Now, Pay Later borrowers is that they lack access to other forms of credit. Our analysis shows that these borrowers are more likely to use other credit products,” said CFPB Director Rohit Chopra. “Since Buy Now, Pay Later is like other forms of credit, we are working to ensure that borrowers have similar protections and that companies play by similar rules.” Source.
Are BNPL Users Borrowing Responsibly?
According to the survey, those most likely to use Buy Now, Pay Later products are Black, Hispanic, and female consumers. Consumers with income between $20,001 to $50,000 also show to be most likely to use these services. BNPL borrowers also had more usage of other loan products compared to non-borrowers.
Included spend categories for loan product usage comparison:
- Retail accounts (62% compared to 44%)
- Personal loans (32% compared to 13%)
- Student loans (33% compared to 17%)
The survey discovered that compared to other types of borrowers, like consumers with open credit lines, personal loans, etc., BNPL borrowers had the most delinquency on those types of loans. Other findings include a comparison showing 18% of BNPL borrowers reported delinquencies. In contrast, only 7% of non-borrowers reported delinquency. Overall Buy Now, Pay Later users had higher delinquency rates for credit (9%) and retail cards (8%). Meanwhile, non-borrowers only scored 3% and 1%.
Finally, Buy Now, Pay Later borrowers were found to have lower credit scores than non-borrowers. This might be because BNPL services typically don’t charge interest rates. As a result, a consumer with bad credit might opt for BNPL services with no interest rates instead of other loan products that charge high-interest rates due to the subprime credit score. Non-BNPL borrowers had nearly prime credit between 670 and 739. However, BNPL borrowers had an average of sub-prime credit scores between 580 and 669.
Related Article: BNPL Loans May Soon Count Towards Credit Scores
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