Life Kit Podcast Episode Summary: "Buy Now, Pay Later Loans Are Becoming More Popular. Here's What to Know"

Release Date: February 20, 2025
Host: Marielle Segarra
Reporter: Andy Tagle

Introduction to Buy Now, Pay Later (BNPL)

In this episode of Life Kit, host Marielle Segarra delves into the rising trend of Buy Now, Pay Later (BNPL) services—a popular alternative to traditional credit cards offered by financial technology companies like Klarna, Afterpay, and Affirm. BNPL allows consumers to split purchases into smaller, interest-free installments, typically over six weeks. According to the Consumer Financial Protection Bureau, one in five shoppers has utilized BNPL for their purchases.

Why BNPL Is Gaining Popularity

Andy Tagle highlights several reasons for the widespread adoption of BNPL:

1. Accessibility: BNPL lowers the barrier to credit, offering options to individuals without strong credit scores or existing relationships with banks.

   "It gives a really large chunk of the population access to credit that didn't have access before." – Andy Tagle [03:13]

2. Ease of Use: The technology behind BNPL is nimble and fast, making the service convenient for users.

   "Buy Now Pay later loans are super easy to use." – Andy Tagle [03:13]

3. Interest-Free Periods: Most BNPL plans offer interest-free repayment options, allowing consumers to manage their cash flow better.

   "A typical plan is four payments stretched over six weeks." – Andy Tagle [03:35]

4. One-Time Transactions: Unlike credit cards that establish ongoing credit relationships, BNPL typically involves a one-time transaction, appealing to those wary of long-term credit commitments.

   "With a Buy Now, Pay later loan, you make the one purchase, you sign up for that one thing, you make your four payments and then you're done." – Andy Tagle [04:19]

Demographics of BNPL Users

Ed DeHaan, a professor at Stanford's Graduate School of Business, and Austin Kilgore, a consumer insights analyst for Achieve Financial, provide insights into the primary users of BNPL:

• Younger Consumers: 28% of unsecured consumer debt among borrowers aged 18 to 24 is attributed to BNPL, compared to 17% across all age groups.

  "Younger people are leaning a lot more on this financial tool." – Ed DeHaan [04:28]

• Individuals with Limited Credit History: BNPL serves those with little to no credit history, offering them a credit alternative they might not have otherwise.

• Credit as a Last Resort: Some consumers use BNPL as a fallback option when other credit products are inaccessible.

How BNPL Works

Marielle Segarra and Andy Tagle break down the process of using BNPL:

1. Selection at Checkout: Consumers choose BNPL as their payment method during online (or sometimes in-store) purchases.

   "You go to checkout and you would choose the Buy Now Pay later provider like Klarna or Afterpay as your method of payment." – Andy Tagle [09:43]

2. Application and Approval: First-time users undergo a quick application process, often approved within seconds using proprietary underwriting algorithms that assess risk without relying heavily on traditional credit scores.

   "You can get approved within seconds." – Andy Tagle [07:28]

3. Payment Plan: Users select a repayment plan, commonly involving four interest-free payments over six weeks. Each purchase is treated as a separate loan on its own repayment cycle.

4. Repayment: Payments are either automatically deducted from the linked bank account or require manual payments, depending on the provider's policies.

Revenue Models of BNPL Providers

BNPL companies primarily generate revenue through two channels:

1. Retailer Commissions: Retailers pay BNPL providers a commission, which is often higher than what credit card companies charge, as BNPL users tend to spend more.

   "Buy Now Pay later providers make money by taking a cut from retailers because people are spending more money at their stores when we use Buy Now Pay Later." – Andy Tagle [08:19]

2. In-App Shopping and Data Utilization: BNPL platforms offer personalized shopping experiences by leveraging user data to drive impulse purchases at optimal times.

   "They put the exact products in front of you that you really want... making that impulse purchasing very powerful." – Austin Kilgore [08:49]

Risks and Downsides of BNPL

While BNPL offers several advantages, it comes with notable risks:

1. Potential for Overspending: The ease of access and installment plans can encourage consumers to spend beyond their means.

   "People might end up spending more than they can afford." – Austin Kilgore [12:08]

2. Debt Accumulation: Missed payments can lead to snowballing debt, as multiple loans accumulate and become harder to manage.

   "Missed payments can snowball quickly. They can be very dangerous." – Andy Tagle [11:25]

3. Psychological Detachment: Consumers may not perceive BNPL as "real debt," leading to lax financial discipline.

   "People don't see it as real debt because it's something that's not attached to a credit card." – Jennifer Streaks [13:07]

4. Impact on Credit Scores: Currently, BNPL usage does not significantly contribute to building credit history, although changes like Apple's reporting to credit bureaus are emerging.

   "If you're exclusively using Buy Now Pay later loans, it's important to remember you're not building a credit history." – Andy Tagle [17:53]

Expert Advice for Responsible BNPL Usage

Experts provide several strategies for managing BNPL responsibly:

1. Read the Fine Print: Understand the terms, including payment schedules, late fees, and conditions for each BNPL provider.

   "You need to look at the fine print... payment schedules, repayment methods, purchase limits, interest and late fees." – Andy Tagle [14:39]

2. Consolidate Providers: Stick to a single BNPL lender to simplify tracking and managing multiple payments.

   "Consider sticking with one lender rather than spreading your charges out across many different ones." – Andy Tagle [15:56]

3. Strategic Timing: Align payment schedules with income streams to ensure timely repayments.

   "Align with when you get paid or when you're going to be able to afford to make those payments." – Jennifer Streaks [16:08]

4. Use Money Management Tools: Employ budgeting apps to monitor spending and set payment reminders.

   "A simple money management app to track your spending and your purchases and to add in alerts when you need to pay." – Andy Tagle [15:02]

5. Be Mindful of Returns: Understand that returning items may complicate the repayment process, as it involves coordination between the merchant and the BNPL provider.

   "Returns may be more difficult if you're buying through Buy Now Pay later loans." – Andy Tagle [16:27]

Conclusion and Final Thoughts

Marielle Segarra wraps up the episode by emphasizing that while BNPL can be a useful financial tool when used responsibly, it is crucial to remain vigilant about spending habits and repayment obligations. Building a healthy credit history remains important for long-term financial well-being, and BNPL should not replace traditional credit-building practices.

"If you decide to use Buy Now Pay later, make sure you can pay the total amount of your purchase, not just the smaller amounts, because missed payments can snowball quickly." – Marielle Segarra [Final Recap]

Notable Quotes:

• "It gives a really large chunk of the population access to credit that didn't have access before." – Andy Tagle [03:13]
• "People don't see it as real debt because it's something that's not attached to a credit card." – Jennifer Streaks [13:07]
• "If you make your payments on time, your credit limit goes up, and that's a bit of an adrenaline or a dopamine hit to people." – Austin Kilgore [12:19]

Key Takeaways:

• BNPL offers a convenient, interest-free alternative to credit cards but comes with potential risks like overspending and debt accumulation.
• Younger consumers and those with limited credit histories are the primary users of BNPL services.
• BNPL providers earn through retailer commissions and personalized in-app shopping experiences.
• Responsible usage involves understanding terms, consolidating lenders, strategic payment timing, and utilizing money management tools.

For more insights, listeners are encouraged to explore other Life Kit episodes on related topics such as credit card points and budgeting for healthy eating.