Could the Buy Now, Pay Later Trend Hurt the Economy?

If you shop online, you've likely seen some of your favorite retailers offer the option to pay for the items in your cart with a buy now, pay later service, rather than all up front. While the obvious benefit of buy now, pay later is the ability to pay for an item or items over time rather than all at once, there are some downsides to this trend to be aware of as well. In this segment of Backstage Pass, recorded on Dec. 17, 2021, Fool contributors Toby Bordelon, Rachel Warren, and Jason Hall discuss. 

Toby Bordelon: Speaking of interesting companies, buy now, pay later. We've heard of that concept layaway, the new version of layaway, with a bunch of these apps doing this, it's hot. It's been hot. It was hot a while ago. I don't know if it's still is, investors they have these streets, they move on, but it's a hot topic of interest for regulators.

That's a moment. It's a huge thing, and regulators are looking at it. CFPB, the Consumer Finance Protection Board is looking into the business. They're looking at practices of companies like PayPal, Affirm, Afterpay, concerns about accumulating borrower debt and misuse of personal data, concerned about that too, but they're looking into this.

I am just curious, what do you guys think of this? What's your take on buy now, pay later? Is this the next big boost to consumer spending? Is this going to be a good and useful tool for consumers? Or is this more like the subprime lending crisis just waiting to happen? Why don't you kick us off Rachel?

Rachel Warren: Yeah. I think this is a great question. I have mixed feelings about this whole buy now, pay later trend. Before I dive into that, I found this really cool study that one of the Motley Fool services, The Ascent released earlier this year, that basically did a survey of a bunch of consumers that are using buy now, pay later.

There was a couple of things that really stuck out to me. One was, 55.8% of consumers have used a buy now, pay later service, which was up from about 38% as of July 2020. So that's an increase of almost 50% in less than a year.

We know more people are shopping online. It seems that's also translating to an increase in how people are shopping online and the mediums they're using to pay for those purchases.

Well, another thing that was very interesting as well, was the age group in which usage of buy now, pay later services grew. So buy now, pay later usage growth was largest in the 18 to 24 age range, up 62%. I don't think that's probably super surprising. But it was also up 98% in the age groups 55 and up. That surprised me, between July 2020 and March 2021.

And 53% of respondents to this survey who had never used buy now, pay later said, they were at least somewhat likely to start using it within the next year. And then finally, 62% of buy now, pay later users thought that that service could replace their credit cards, although only about a quarter wanted it to.

So clearly this is something that's gaining a lot of traction. I think that it's definitely a big boost for consumer spending. I think there's a few different ways to look at it. On the one hand, I think it does make buying items more attainable.

Perhaps if you don't have all the money upfront, there's a lot of things where you might pay installments for example, you buy a new couch, from some big store, you may not pay for it all at once.

You may pay for it in installments. I like it better than spending with a credit card in the sense that you're not paying with money, you may or may not have, you're simply paying in installments on specified deadlines. But there's a couple of concerns that I have with this. First, I think if you're going to use buy now, pay later, you need to understand how the system works.

Different buy now, pay later services have essentially different rules of how they do interest and fees for example, if you were late with the payment. So I think it's important to understand how you're using it. Are the payments interest-free for the first four payments or is there a certain interest level involved if you default? How many payments do you have to pay off the item?

Because, if you default on a buy now, pay later payment, it can result in a ding to your credit. There's also potentially late fees that are involved if you don't meet those payment dates, so something to be aware of.

The other thing I'm concerned about with this, I think it can be a useful tool, but I think it's something to be careful with because I think this whole trend can encourage people to live beyond their means. You can use this responsibly, but I think it--

Jason Hall: You mean to say that 18-24 year olds consistently make perfect financial decisions and never [laughs] live beyond their means?

Warren: Yeah. I know when I was 18 I always made perfect financial decisions.

Hall: I defaulted on an American Express card when I was 20.

Warren: Yeah.

Hall: I refused to confess what the purchases were. It's none of your business.

Warren: That's OK. I'm good. [laughs] I think the point is though, the idea is maybe you see something you want and you really can't afford it. But you think, well, if I only pay a little bit at a time, that can work in some cases, but it can also be a very fine line between where then you're really living over your means.

So I don't think it's the next subprime lending crisis. I think it's a tool that if used correctly, it can be useful. But I also think this is going to be an area where you see a lot of people occurring interest, buying things they can't afford, and just like the credit card companies have used that habit from consumers to make money from interest and other types of late fees, I think that's something we could be seeing from these companies that do buy now, pay later.