The risks in buy now, pay later holiday purchases: Credit experts

“Buy now, pay later” has become a popular payment tool among young consumers, replacing standard bank credit cards. And this year, the largest retailers are adapting to the trendy payment option for the holiday shopping season. But it comes with a warning: defaults on “BNPL” payments have been rising and experts worry BNPL can be a recipe for overspending.   

More than half of all consumers plan to use BNPL in the next year, and that’s good news for merchants. Shoppers tend to spend more per purchase when they use BNPL, according to McKinsey.  

The spending option is being offered for purchases large and small.

In September, Amazon struck a deal with Affirm that would allow consumers to split purchases of $50 or more into smaller monthly payments, a trend that Dan Dolev, Mizuho analyst, told CNBC’s “TechCheck” is growing. “The big trends we are looking at is the move toward lower ticket items,” Dolev said. “And we are seeing that in the Amazon deal with Affirm.”  

Everyday spending items, like a pair of shoes, is a BNPL space retailers want to accommodate, according to Dolev, because of the frequency and low risk of the purchases. “You aren’t going to go bankrupt on a pair of shoes.” 

Fintechs Square and Paypal bought into the BNPL space recently too.

Macy’s, Amazon and Walmart are among the biggest retailers that have begun offering “buy now, pay later” payment options. In October, Target announced it would adapt to BNPL ahead of the holiday shopping season to make shopping “more flexible and personalized to guests’ needs, right in time for the holiday season,” the company said in a statement. 

Target said its partnership with BNPL firms Sezzle and Affirm will let consumers pay at a pace that best suits them. “It’s a handy option during the busy holiday season and all year long,” the company said.  

Sezzle will break each small purchase, like festive party supplies or holiday PJs, into four interest-free payments over six weeks. The retailer also suggests consumers pay off big ticket items like electronics or new furniture sets with Affirm because of its longer payment period options. 

Holiday retail sales have inclined steadily over the last decade. In 2000, holiday retail spending totaled to $400 billion. Comparably, and despite being in the peak of a global pandemic, 2020 holiday sales reached near-$800 billion, according to the National Retail Federation, which is predicting the sales will set a new record again this year.

In 2021, consumer spending is up, the economy is reopening, and consumers are ready to shop for the holidays.  

1 in 3 Americans expect to take on debt this holiday shopping season, according to an October Credit Karma survey. But no matter how people plan to purchase their holiday items, consumers should be mindful of their spending, and any interest or late fees that…