“Buy Now, Pay Later Keeps People Spending—Without Credit Agencies Knowing” - Angel Au-Yeung

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In Angel Au-Yeung’s article, she writes about how more and more consumers are starting to use pay-over-time loans and services for various items, ranging from shopping to medical purposes. The article begins by describing a woman who works at Walmart and uses the company Afterpay for all her expenses.

Afterpay is a company that essentially lets you buy something and pay for it in installments. Although these are still loans, they only charge her credit cards incrementally, allowing her to pay off her cards while keeping her credit score stable, and enabling her to make payments each month (or at other intervals, such as weekly). Since she doesn’t have to pay for everything she buys in full at the time of purchase, this method offers her more flexibility. Additionally, she notes that credit scoring agencies like Equifax cannot see the activity of pay-over-time companies, reducing the risk of her credit score being negatively impacted.

Au-Yeung explains that while consumers are drawn to these new pay-over-time services, they can have negative consequences. Not only do these companies often charge high-interest rates, but they also encourage people to spend more than they can afford, leading them to accumulate debt because it feels like they are spending less when using one of these services. According to her article, one-quarter of all adult American shoppers have used pay-over-time services, such as Afterpay, Affirm, and other companies gaining popularity. Furthermore, the article mentions that during Black Friday and Cyber Week, two major American sale days, 7.2% of all online purchases were made using payment plans, a 25% increase from the previous year (Au-Yeung). These companies can cover large amounts, up to $20,000, making them an enticing option for people financing significant purchases that don’t require a lease or mortgage.

Additionally, interest rates are variable and depend on several factors. The first factor is the consumer's financial characteristics, such as their credit score. The second is the frequency and amount of the payments. The third is the item being purchased and its cost. According to Au-Yeung, interest rates for buy-now-pay-later financing can range from 0% to 36%. Notably, the Federal Reserve and Au-Yeung point out that the average annual interest rate on credit cards is 21.19%, making the lower rates of pay-over-time services more attractive for people looking for alternatives to credit cards, which typically must be paid off monthly, limiting spending on credit to what people can afford to pay with their savings or checking accounts.

The article uses a $100 outfit as an example to illustrate the difference between using a credit card and a payment plan. If a person buys the outfit with a credit card, they must pay it off by a certain date or face interest charges, which can accumulate and cause balances to snowball. By contrast, a payment plan allows the buyer to spread out the payments and know the total cost, including any interest, by the end of the plan. This ability to avoid credit card debt while spreading out payments is what makes pay-over-time services so appealing to consumers.

Initially, companies like Afterpay and Affirm were intended for financing high-cost items, such as luxury clothing. However, their scope has expanded to include essentials like groceries and medical procedures, illustrating their growing popularity. According to the article and the Consumer Financial Protection Bureau, the use of these payment plans for necessities increased by a staggering 434% from 2020 to 2021.

After providing an overview of the appeal of these payment plans, Angel Au-Yeung highlights real-life cases of people who have used them. She mentions Paden Brown, a truck driver who uses Affirm to purchase groceries and home essentials when his income is insufficient. However, he also uses these plans for non-essential items like gaming and experiences. Another example is Kristina Koltyk, a postal worker who buys essentials with her credit card but uses Affirm for most of her other purchases. According to Au-Yeung, there is a stigma surrounding credit cards, leading some people to avoid using them, even though credit cards offer benefits like fraud protection. She also notes calls for increased regulation of the pay-over-time industry, which is currently under-regulated and leaves room for financial risks.

Finally, the article discusses how pay-over-time companies don’t run full credit checks, meaning these checks don’t impact the buyer's credit score. While reporting these loans to credit agencies hasn’t fully developed yet, companies like Equifax, Experian, and TransUnion are pushing for this information to be disclosed by the end of the year. One person in the article shares a negative experience, explaining that these plans can trick people into spending money they don’t have. She paid off her payment plan with a credit card, but when emergencies arose, she struggled to cover the costs because her emergency funds had been used to pay late fees on her credit card. Overall, these plans can create the illusion that consumers can afford more than they actually can, as the appeal lies in not having to pay the full amount upfront.

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Sources

Au-Yeung, Angel. “Buy Now, Pay Later Keeps People Spending—Without Credit Agencies Knowing.” WSJ, 17 December 2023, https://www.wsj.com/personal-finance/credit/buy-now-pay-later-industry-watchdog-groups-beed96c8?mod=personal-finance_feat1_credit_pos2. Accessed 24 June 2024.