We’ve all encountered this newish feature of online shopping that can sometimes seem too good to be true. You need to make a major purchase costing a few hundred dollars—an amount most of us will definitely feel. But you need the item.
Then, up pops a screen offering to break the purchase into six or eight manageable—and interest-free!—payments. How great is this, you think.
Sometimes, and for some consumers, this can be great. But for others, it’s yet another new, tech-enabled financial trap. In October, the lending site Lending Tree released its annual report about the use of these so-called buy now, pay later loans, a relatively new fintech product that allows people to quickly get approved for small loans, through apps on their phones, for online or in-store purchases.
Almost half of Americans used at least one of these loans in the past year. An increasing number have used them because they can’t afford everyday goods like groceries, are holding more than one loan at a time, and have made a late payment on them.
In other words, during these hard times, these loans have become another way to squeeze money out of working people increasingly desperate to make ends meet. Worse, we don’t even fully understand how these mostly unregulated loans are going to impact consumers in the long term.
That’s a big reason why some Democratic lawmakers are looking for more answers about how much these loans truly cost working Americans. “Millions of Americans use buy-now-pay-later because they’re stretched thin,” Massachusetts Senator Elizabeth Warren said on X in May, when she joined three other Democratic senators in sending a letter to the credit reporting bureaus. “The last thing they need is to be penalized on their credit score for it—especially with no transparency, no consistency, and no recourse.”
Buy now, pay later loans—from companies like PayPal, Affirm, Klarna, and CashApp Afterpay—can seem like a lifeline. Borrowers can sometimes get one without a hard credit inquiry, and the balances aren’t reported to the credit reporting bureaus. But when users miss payments, they can be hit with late fees, and too many missed payments mean the account can be turned over to a debt collector. Moreover, customers who sign up for auto-pay may face overdraft fees when payments are automatically deducted from their checking accounts.
Experts worry that these terms aren’t always clear to borrowers. During online checkout, the loans seem like easy installment payment plans, often with little or no interest. They can seem worry-free. But if borrowers don’t pay the loans back within certain time frames or get bigger loans, they might have to pay high interest rates that aren’t always clear up front, making them a more expensive option over time. And if they borrow too much or are late too often, they can find themselves cut off from more of the loans they’ve been relying on.
What’s worse, people often turn to these products when they’re already deeply in debt. In September, researchers at the Century Foundation and Protect Borrowers, a nonprofit that fights predatory lending, released a report showing that half of all workers’ wage gains since 2022 have gone to debt service, mostly to credit cards and auto loans. That means that rather than using any increases in wages to save, get ahead, or improve their lives, they’re using extra money they earn to pay back the debt they’ve taken on as their lives have grown increasingly unaffordable.
That research didn’t even include data from buy now, pay later loans because they’re not reported to the credit bureaus. But it helps explain why consumers have had to turn to this additional lending option to pay for their basic expenses. Their income gains have gone to debt service, their credit cards are already maxed out, and their interest rates are high. They turn to buy now, pay later because they have nowhere else to turn.
“It’s often people who are already distressed who are taking this on as just a lifeline to be able to pay their groceries for the week or kind of meet their basic needs,” said Angela Hanks, chief of policy programs at the Century Foundation. She said the loans were initially marketed for big, luxury purchases, but that’s not how consumers have used them. “What we’re actually seeing is that people are using it because they’re maxed out on their credit card, they have a paycheck that hasn’t meaningfully gone up in quite a long time, and they still need to buy groceries to feed their kids. They still need to put gas in the car, they still need to buy their kid who’s grown out of their shoes from last year a new pair of shoes. So they’re finding people who are using it more and more to make their ends meet.”
Customers can quickly find themselves in over their heads. “The collection tactics of the buy now, pay later lenders are much more aggressive than what you see from your average credit card company,” Hanks said. It also helps explain why consumers are so upset about the economy. They’re not just paying higher prices for gas and groceries; they’re paying higher prices plus interest rates higher than 20 percent because they’ve had to use credit cards or take out loans to buy them.
So what can the Democrats do, if they retake power in one or both houses of Congress? Back in May, four Democratic senators—Warren, Richard Blumenthal of Connecticut, Tammy Duckworth of Illinois, and Mazie Hirono of Hawaii—send letters to Experian, Equifax, and TransUnion asking for more information about how buy now, pay later loans were used by the credit bureaus. While the buy now, pay later lenders don’t automatically report information to the bureaus, those bureaus can get that information and have been less than forthcoming about how they interpret it and incorporate it into their scores. “The current infrastructure of credit reporting in the United States is extremely opaque; the credit reporting industry has been very secretive about its scoring models, which presents major, potential consumer protection issues. With the rise of data harvesting, credit reporting companies hold more information about consumers than ever before,” the letter said.
Under President Biden, the Consumer Financial Protection Bureau tried to regulate buy now, pay later loans like credit cards, but the industry sued and President Trump stopped trying to enforce the new regulations. While some states, like Illinois, New Jersey, and New York, have started to try to regulate the loans, New York Representative Daniel Goldman, a Democrat, has introduced a bill to subject them to the Truth in Lending Act. The bill has been referred to the Financial Services Committee, which ranking member Maxine Waters is set to lead if Democrats retake the House. She has supported the CFPB’s regulations of such products in the past.
Because credit scores will impact how many Americans, especially those with lower incomes, can buy cars, get apartments, or meet other basic needs, the senators want to know how the increasingly high buy now, pay later debt burdens they’re carrying will be used in those scores’ calculations. Just having the debt could cost consumers more money over the long term because it could impact the interest rates they pay. It could cost them even more if they fall behind and enter collection.
It’s like a bomb waiting to go off. Americans have been using their wage increases to service their debt. Now that real wages aren’t rising as fast as they were, we could be on the edge of a looming debt crisis.
It’s a problem that’s been building for decades, Hanks said. “I think we’re just at a point where people are feeling quite broken by it,” she said. “They’re feeling it because they can’t get affordable health care, because they can’t get affordable childcare, because they can’t get affordable education, and all of those things keep getting more and more expensive. And there’s sort of less help from the places where they should expect it,” That means there are more opportunities for banks and lenders to step into the void. “They’re around every corner, ready to sell them a product that’s quite expensive in order to meet that need.”
