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When she started holiday shopping late last year, Kelly Andersen struggled to buy gifts for her loved ones. So he turned to a new solution to get through the season: Buy now, pay later.
The 31-year-old freelance copywriter from Los Angeles used Klarna and PayPal to split a variety of purchases into four interest-free payments spread over a series of weeks. At the time, its original cost was about a quarter of the total purchase price.
But now that January is here and the remaining installments are due, Andersen isn’t sure how she’ll pay them off. She’s never missed a payment before and takes debt seriously, but finds herself buried under a mountain of micropayments, wondering how she’ll cover her bills.
“I definitely sell clothes … if I have to go sell a pair of shoes to make a payment, I will,” Andersen told CNBC of the roughly $1,700 she raised for buy-now, pay-later debt. “I’m definitely worried [the payments]. It’s definitely a concern and I’m definitely going to have to find a way to get the money.”
Andersen is one of many Americans who turned to buy now, pay later to finance their holiday shopping last year to avoid credit card debt, but are now having trouble paying off those bills.
At a time when persistent inflation and record high interest rates are shaping financial decisions for many shoppers, the service helped fuel a boom in total online spending that topped $222 billion between Nov. 1 and the end of December. During the buy-now-pay-later season, usage hit an all-time high, growing a staggering 14% from last year and contributing $16.6 billion to online spending.
On Cyber Monday alone, buy-now-pay-later usage was up nearly 43%, Adobe said.
“Sales, especially online sales, have likely slowed to some extent due to buy now, pay later,” said Ted Rossman, senior analyst at Bankrate. “Many people are attracted to this method of financing as an alternative to something like a credit card where the average interest rate is a record high 20.74%. I would like to warn that you can still run into problems with buy now, pay later .. . may still encourage you to overspend and cheat yourself.”
The surge in buy now, pay later use comes as credit card debt hits an all-time high and delinquency rates have nearly doubled in the past two years. While delinquencies were at historic lows during the Covid-19 pandemic, the percentage of people who went more than 30 days without paying their credit card bill recently surpassed pre-pandemic levelsaccording to the Federal Reserve.
It’s hard to say how buy now, pay later fits into the overall picture of the country’s debt. The providers that offer the service usually do not disclose how often these accounts go unpaid and the debts are not reported to the credit bureaus. Klarna, PayPal and We confirm all declined to share buy now pay later delinquency rates with CNBC.
Affirm said the short-term and high-speed nature of the buy-now, pay-later service makes traditional credit metrics less relevant. It writes off these unpaid loans within 120 days, which is why it doesn’t disclose delinquency rates for the service. It discloses other credit metrics for its longer-term loans.
Klarna and Affirm previously told CNBC that their underwriting strategies ensure that only people who can repay short-term loans can access the service, because their business models wouldn’t work if people frequently missed payments. While Klarna charges late fees of more than 25% of the purchase price, according to an overview of its terms and conditions, Affirm does not.
Klarna said the global default rate for its entire business, including buy now, pay later, is less than 1%. In the US, 35% of consumers pay the company early, he said.
The opacity surrounding the new service has created a so-called phantom debt phenomenon that has left economists, regulators and even buyers worried about the impact it could have on the economy.
“It’s just this nebulous cloud of debt. Nobody really knows how it works and it’s just floating around us all the time and it definitely feels like a pending housing crisis, almost like 2008 but for shopping,” Andersen joked. “That’s the myth that Klarna and PayPal sell you, is that you can have this lifestyle, you can have these things, but the truth is you can’t.”
The “beast” of buy now, pay later
Alaina Fingal, a New Orleans-based financial coach and founder of The Organized Money, usually gets five or six emails in early January from people who overspent during the holidays and need help managing their finances.
This year, it was closer to 20 or 25.
“Most people used all their cash, ran out of cash, then put it on a credit card, and then if they overpaid the credit cards, they’d go to other services like buy now, pay later,” Fingal said. CNBC.
Fingal said she spoke to a customer who had two maxed-out credit cards and used two buy now, pay later services, causing her to struggle to make payments.
“Since she couldn’t afford it in the first place, these minimum payments are making it very difficult for her to cover food and her normal bills for this month,” Fingal said. “So this creates a cycle that becomes harder and harder to break out of.”
While it’s unclear how often buy-now, pay-later bills go unpaid, people who use them are more than twice as likely to default on another credit product, such as a car loan, personal loan or mortgage, according to 2023 study by the Consumer Financial Protection Bureau. People who use the service also tend to have higher balances on other credit products and lower credit scores, according to the CFPB.
As more buyers use the products, consumers are divided on how they feel about it. In the weeks after Christmas, some on social media platform X, formerly known as Twitter, said they were grateful for buy now, pay later and couldn’t buy holiday gifts without it.
Others called it “dangerous” and vowed to stop using it as a New Year’s resolution. At least one buyer said he had to use the rent money to pay for his purchase now and pay the bill later.
“Buy now, pay later is a beast. It sure is. But you have to be the biggest beast.” said Hensley Resiere, a loyal Klarna user, in response to the difficulties some shoppers have with the service.
In an interview with CNBC, the 34-year-old refugee worker from Jersey City, New Jersey, said Klarna helped her provide an “amazing” Christmas for her family. But when she first started using buy now, pay later during the Covid-19 pandemic, she had trouble keeping up with payments and found herself overdrawn by hundreds of dollars and overwhelmed with charges.
“When I realized I could still get what I wanted, like designer items, and not have to pay the entire purchase on the spot, I lost my damn mind… It was like a kid in a candy store,” Resiere recalls. “Let’s say Klarna gave me $1,000. In my head, I was like, ‘Oh my God, that’s free money.’ So I spend the thousand, forgetting that I have rent, bills, car insurance, all these bills, groceries, everything ».
Resiere was in a cycle where she had to wait to be paid to cover her overdraft fees. These days, she has a system to manage payments so they don’t interfere with her other accounts.
“Even though I’m in my career now and of course I’m making more money, any way I can split my payments and not worry about the bills, I’m definitely, definitely all for it,” Resiere said. “It splits the payments, so I don’t really feel it. Yeah, I’m paying the same amount, but the fact that it’s spread out, it doesn’t hurt as much.”
Branika Pride, a mother of three who lives in Birmingham, Alabama and works in higher education, told CNBC that she used Afterpay, blockShop now pay later service this Christmas to buy her kids an ice machine, a PlayStation 5 and Drake concert tickets. It uses a variety of providers, depending on what the retailer offers. Pride said the service was helpful this Christmas because she waited until the last minute to start shopping and was reluctant to submit the full cost of purchases right away.
“I’ve used it before, not as heavily as this time,” he said, adding that he raised about $1,300 in buy-now, pay-later debt over the holidays. “I didn’t really get into the holiday spirit until Christmas week. So it was kind of funny at the end when I just made all the purchases that I was like, “Oh, I’m going to regret it. two weeks.'”
Pride said she’s never had a problem meeting her buy now, pay later payments and usually uses the service around payday, so she knows she’ll have the money by the time the next installment comes out. She appreciates the flexibility it gives her, but acknowledged that it can promote overspending or hinder her larger financial goals. Without it, he probably wouldn’t buy as many distinctive items as he does.
“Every year I say I don’t want to take it to New Year’s,” Pride said. “But somehow, it always comes with me.”
CLARIFICATION: This story has been updated with additional information about Kelly Andersen.
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