'Buy now, pay later' loans skyrocket 1,100% over just 2 years—but that’s not the worst part

American lenders have found a new way to hook consumers: “buy now, pay later” (BNPL) loans, a segment of the credit industry that has grown 12-fold in recent years.

After surveying five major lenders—Affirm, Afterpay, Klarna, PayPal, and Zip—the Consumer Financial Protection Bureau (CFPB) found that the number of new BNPL loans surged by nearly 1,100% between 2019 and 2021.

In absolute numbers, the top five lenders originated $24.2 billion in BNPL loans in 2021, up from just $2 billion in 2019.

Although BNPL programs are often marketed as interest-free loans, lenders are still collecting sizable fees. According to the CFPB, BNPL providers charge an average fee of $7 on a missed payment based on an average loan of $135.

The report identified several “competitive benefits” of BNPL loans compared to traditional credit cards, such as interest savings and ease of use. But this convenience comes with risks, including “discrete consumer harms.”

“The BNPL product is often structured in ways that may present borrowers with undesirable operational hurdles, including the lack of clear disclosures of loan terms, challenges in filing and resolving disputes, and a requirement to use autopay for all loan payments,” the report said.

Perhaps the biggest issue is that BNPL loans encourage consumers to take on more debt than they can afford.

A gateway to credit addiction

Although the CFPB study covers the 2019-2021 period, more recent data suggests that one in four online shoppers have used BNPL loans over the past two years.

Much of it wasn't out of convenience, though. According to New York Fed research, BNPL loans are primarily used as an alternative lifeline by America’s most financially vulnerable demographic.

“The financially fragile are disproportionately likely to use BNPL at higher frequencies and have it as a regular payment option,” the Fed reported.

Worse, BNPL loans are just a drop in the revolving credit bucket. According to the New York Fed, in the first quarter, Americans collectively held $1.13 trillion in credit card debt, with nearly 9% of the balances in delinquency.

Bruce McClary, a spokesperson for the National Foundation for Credit Counseling, said the growing usage of BNPL loans signals “an increase of short-term debt” on top of outstanding credit card balances.

BNPL loans also raise the risk of encouraging shoppers to splurge on more expensive items, such as jewelry, video games, and high-end clothing.

It doesn’t help that the typical BNPL user “already has more debt, is already more financially vulnerable, and under stress,” according to Jennifer Chien, a senior policy counsel for Consumer Reports.