As familiar as Americans are with the concept of credit, many of us, upon encountering a sandwich that can be financed in four easy payments of $3.49, might think: Yikes, we’re in trouble.
Putting a banh mi on layaway—this is the world that buy-now, pay-later programs have wrought. In a few short years, financial-technology firms such as Affirm, Afterpay, and Klarna, which allow consumers to pay for purchases over several interest-free installments, have infiltrated nearly every corner of e-commerce. People are buying cardigans with this kind of financing. They’re buying groceries and OLED TVs. During the summer of 2020, at the height of the coronavirus pandemic, they bought enough Peloton products to account for 30 percent of Affirm’s revenue. And though Americans have used layaway programs since the Great Depression, today’s pay-later plans flip the order of operations: Rather than claiming an item and taking it home only after you’ve paid in full, consumers using these modern payment plans can acquire an item for just a small deposit and a cursory credit check.
From 2019 to 2021, the total value of buy-now, pay-later (or BNPL) loans originated in the United States grew more than 1,000 percent, from $2 billion to $24.2 billion. That’s still a small fraction of the amount charged to credit cards, but the fast adoption of BNPL points to its mainstream appeal. The popular embrace of this kind of lending system says a lot about Americans’ relationship to debt—particularly among the younger borrowers who made BNPL popular (about half of BNPL users are 33 or under). “We found that most of the people that use buy now, pay later either don’t have or don’t use a credit card,” Marco Di Maggio, an economist at Harvard, told me. He said that Gen Z was skeptical of credit cards, possibly because many of them had seen their parents sink into debt. Following the ’08 financial crisis, personal debt became a public bogeyman. The elimination of housing wealth for millions of Americans fueled a credit crunch, in which banks tightened credit standards and sharply curtailed their lending. Government agencies such as the Consumer Financial Protection Bureau also strongly discouraged overextension.
“We have sort of indoctrinated younger borrowers in the idea that having credit-card debt is bad,” Anastasiya Ghosh, a University of Arizona marketing professor, told me. Ghosh’s research involves polling consumers about which method of spending makes them feel the most guilty. “Credit cards are always the worst,” she said. Conversely, when given the option between BNPL and debit, shoppers made no moral distinction. Even the most prosaic items were fair game for financing. Ghosh had assumed people would tend to reserve BNPL “for hedonic things that are harder to justify”—until a control group in one of her studies happily used it on groceries. “They felt absolutely nothing negative,” she said, “which blew my mind.”
Older consumers might see fractured payments on chicken thighs as a sign of financial precarity, but many young people find BNPL’s nuances liberating, Di Maggio told me. They perceive credit cards as encouraging a kick-the-can attitude toward debt, with interest steadily accruing from month to month. (Indeed, roughly 60 percent of credit-card holders don’t pay the full amount on their monthly bills, according to a McKinsey survey.) Traditional lenders profit from sustained delinquency, whereas most BNPL loan terms are fixed at six weeks. BNPL providers can offer zero-percent interest rates because they charge merchants three to four times the average credit-card processing fee. To many Gen Zers, that business model seems less risky than credit cards. It gives them a sense of security that the debt from a purchase won’t balloon from interest and hang over their heads forever.
The tendrils of those credit-card anxieties stretch all the way to Instagram and TikTok, where countless “debt success stories” feature creators digging their way out of credit-card bills. As the reigning king of product placement, Instagram is a crucial node in the BNPL network: #Afterpay is tagged in more than 1.6 million posts on the platform, most of them from brands and influencers hawking apparel. But Gen Z’s lifestyle gurus live on TikTok, where they articulate new modes of consumption in real time—distilling whole philosophies at incredible scale.
To a generation of borrowers, zero interest means free money, and the idea of paying down daily indulgences doesn’t faze many young consumers. “One thing about me? Ima Afterpay that shit,” says the creator behind All Things Naisa on TikTok, where she has more than 130,000 followers. “I don’t care if I have $40 million in my account. I don’t care if the cart came up to $6.74. Afterpay that shit!” The video has almost 180,000 likes. In another video, John Liang, a TikTok influencer with 2.1 million followers, presents the decision to use BNPL as one of pure reason. Standing in front of a green-screened Apple Store, Liang explains that by not paying the total price for a product upfront, he can invest the remainder of his money.
When I pitched this latter reasoning to Di Maggio, he said it made little sense economically and psychologically. He pointed out that investments don’t typically yield appreciable returns over just six weeks. And even if they did, most consumers who find an extra $20 or so in their pocket don’t think to buy stocks or bonds with it—they spend it on something else. A recent study he co-authored supports this notion, finding that BNPL use causes a permanent increase in total spending of about $60 a week, stretching the average household retail budget 30 percent. Another study found that, on paper, people who borrow from these financial-technology firms look as creditworthy as their conventional-banking counterparts, but “after they get the loan, they are much more likely to be delinquent,” Di Maggio said. BNPL delinquency rates are outpacing those of credit cards, and the companies have seen their valuations slashed in the face of waning interest from investors.
Many financial-technology firms frame their mission as one of inclusion—they say they’re building a bigger tent for America’s un- and underbanked, which include gig workers and young people with poor credit histories. Klarna, for instance, recently launched a “creator platform” to match merchants with influencers who have access to their target audiences. But because BNPL providers aren’t subject to the same scrutiny as banks (most of them engage in forms of lending not explicitly covered by the Truth in Lending or Dodd-Frank Acts), consumer protections are scant. BNPL programs increase the likelihood of borrowers dipping into their savings and incurring overdraft and other fees. And most of the companies don’t furnish credit-score-boosting data to agencies such as TransUnion, meaning that even if you use BNPL and pay on time, “you have thousands of dollars of debt on your balance sheet that nobody knows about,” Di Maggio said.
What companies like Klarna once characterized as paradigm-busting behavior—young people rejecting stodgy banks in favor of more freeing forms of finance—now looks like the crest of yet another credit cycle, a familiar note in the motif of American consumption. As with young credit-card holders, BNPL users under 25 have the highest default and delinquency rates. If credit dries up in a broader downturn, they are at risk of losing access even to those programs. Meanwhile, they may find that their reliance on these parallel lending methods, which only glancingly intersect with the conventional credit ecosystem, has hobbled their credit history at the worst possible time.
The new debt, in many ways, is exactly the same as the old debt. On TikTok, a small cadre of folks is starting to inch toward denunciation. The opening line of one finance influencer’s video last month: “I’m gonna explain to you why you should never use the buy-now-and-pay-later feature.”