Folks who use buy-now-pay-later loans rely more heavily on other types of credit and are often more financially stressed versus those who don’t use the checkout loan, a new report from the Consumer Financial Protection Bureau found.
The study, which builds on a survey fielded in 2022, found that at least 62% of BNPL borrowers said they used retail credit cards compared with 44% of non-BNPL consumers. Additionally, more than a third of BNPL users relied on personal loans and student loans compared with non-users.
Shoppers who purchased with BNPL tended to be from low-income or minority households and were more likely to use high-interest financial services like payday loans, pawn shops, and overdraft, the government watchdog noted. This could potentially make them more vulnerable to potential late payments and fees.
“A common misconception of Buy Now, Pay Later borrowers is that they lack access to other forms of credit,” CFPB Director Rohit Chopra said in a statement. “Our analysis shows that these borrowers are more likely to use other credit products.”
Consumers who relied on BNPL and had existing credit accounts were more than twice as likely to be delinquent on at least one of those by 30 days or longer, the CFPB found.
For instance, 18% of BNPL users had at least one reported delinquency in another account, the report said, compared with 7% of non-borrowers. Delinquency rates were also notably higher for credit (9%) and retail cards (8%) among BNPL borrowers versus non-users at 3% and 1%, respectively.
Nearly 7 in 10 BNPL borrowers carried over a credit card balance from one billing cycle to the next, signaling difficulty paying off their borrowings. They also had a higher likelihood of having an overdraft.
Lower-income borrowers face greater financial hurdles
BNPL borrowers were more likely to be Black, Hispanic, and female and have household incomes between $20,000 and $50,000, the government watchdog said. The use of BNPL was also more prevalent among renters (22%) versus homeowners (15%) as well as consumers under 35 (22%) compared with those over 65 (10%).
They also tended to have lower credit scores compared with non-users. For instance, while consumers who did not use BNPL consistently had near-prime (670-739) credit scores, BNPL users had an average score in the sub-prime category (580-669).
According to the CFPB, folks who had lower credit scores were more prone to facing higher credit card interest rates in 2022 — between 19% and 22%. That’s much higher now, thanks to the Federal Reserve’s efforts to rein in inflation. As of February 2023, borrowers with excellent credit may get an average 23.55% rate on a new credit card, while those with lower scores may get up to 27% APR.
That could play into why some budget-conscious folks choose BNPL at checkout.
“BNPL financing may appear more attractive to lower-income consumers who find interest-free installments more affordable than making the entire purchase at once,” the study said. “At the same time, the lowest-income group may have insufficient disposable income for consumption in general, including that financed through BNPL.”
BNPL: Good or bad?
Though borrowers who used BNPL loans were more likely to show significant signs of financial distress, they were in similar financial straits before the rising popularity of BNPL in 2019, the survey found.
As zero-interest installment payment loans become more marketable — especially as inflation remains a top concern — it’s likely that more borrowers will turn to these loans over high-interest products such as payday loans, retail cards, or credit cards. The next question is whether the use of BNPL can improve the financial wellbeing of consumers in distress or make it worse, the CFPB report posited.
The bureau has previously raised concerns over BNPL, including inconsistent consumer protections, data harvesting methods, and potential harm to consumers through ‘adept accumulation’ or risk of overextending their budgets.
“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,” Chopra said.
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
Read the latest financial and business news from Yahoo Finance