Buy now, pay later (BNPL) apps and products have rapidly emerged in the consumer lending space and within a few years have become the standard for financing purchases.
It’s no exaggeration to say that as a result of the recent BNPL boom, American retail and consumer spending habits have been forever changed, as shoppers no longer need to use credit or save up for big-ticket purchases.
With nearly every retailer offering this payment option through apps, in-store loans, and credit cards, the question arises: How far can this financing model grow, and what changes has it already caused in consumer spending habits?
Experts attribute the rapid growth to convenience and low costs.
The growth of “buy now, pay later” transactions has been steady, with the number of consumers using the tool increasing by 40% in just two years, according to a 2024 report from the Federal Reserve Bank of Boston.
The report also found that BNPL users tend to be repeat customers.
“Similar to credit card revolvers, BNPL users tend to repeat their behavior over time: 55% of consumers who used BNPL in 2023 also used BNPL in at least one of the past two years,” the report states.
Compared to similar financing products, the “buy now, pay later” option may seem like the obvious choice for many when financing a larger purchase. “It’s a very low-cost, and usually free, way to diversify your cash flow,” says Geoff Brown, co-founder and CEO of Highline Technologies.
If you make a $400 purchase on your credit card and you’re not prepared to pay it off, you’ll be charged interest. Brown explains that with a BNPL loan, the overall financial risk is less in the same situation. “The penalty is that you can’t make any more purchases until you’ve caught up on your payments,” he says. “It’s a much milder consequence… and there’s less risk from the consumer’s perspective.”
Younger and indebted consumers are more likely to use BNPL plans
According to Bankrate’s “Buy Now Pay Later” survey, 56 percent of users said they’ve experienced at least one issue while using the service, with Gen Z reporting the highest percentage. Specifically, 34 percent said they’ve spent more money than they should, and 28 percent reported having trouble returning an item or getting a refund.
Chad Willardson, founder of Pacific Capital and a certified financial fiduciary, said the rise in BNPL apps and loans among Gen Z and millennials is due to several factors, including “a preference for ease of use, instant approval, no- or low-interest loans, and flexible payment options.”
“The growth of e-commerce, targeted marketing and reduced reliance on traditional credit products are also contributing to the popularity of BNPL services among younger generations,” Willardson added.
Trinity Owen, founder and CEO of The Pay at Home Parent, advises millennials and Gen Zers to consider their financial situation holistically before taking out a BNPL loan: “I’ve seen first-hand the growing popularity of buy now, pay later loans among millennials and Gen Z,” she writes.
“Younger people are more likely to get caught in a cycle of debt that can have long-term effects, negatively impacting their credit scores and limiting their ability to finance future purchases like a home or car,” she adds. Rather than relying on lending apps, Owen suggests that this age group focus on building passive income streams and practicing smart budgeting to achieve financial independence.
“As millennials and Gen Z navigate our rapidly changing economy, it’s more important than ever for them to prioritize financial education and smart decision-making,” she concludes.
Frequent use could lead to “overborrowing and financial instability”
With this increased attention has come mixed reviews, with some experts arguing that the BNPL lending model could be beneficial for certain American consumers, while others advise shoppers to avoid these products altogether.
As with most forms of consumer lending, there is no black-and-white answer as to whether BNPL products are an asset or a liability to the lending industry or the general public. It primarily comes down to how consumers assess financial risk when using these apps and how they manage their payments.
“These loans are becoming increasingly popular with consumers, but they come with risks that lead to overborrowing and financial instability,” says Edward Maslaveckas, founder and CEO of Bud Financial. “They also offer flexible repayment terms, which can be helpful for people with irregular incomes or unexpected expenses.”
As with credit cards, users need to understand the psychological impact of making a purchase with future funds. If funds are not present or available at the moment, it is important for consumers to understand how making larger monthly payments will affect their budget.
Increase in “buy now, pay later” expected to surpass current usage
Juniper Research predicts that macroeconomic factors will drive a 291 percent increase in buy now, pay later spending globally in 2027. The study predicts the platform will reach $437 billion in 2027 due to “growing financial pressures from rising costs of living.”
Experts agree that the trend isn’t slowing down anytime soon. “I definitely think it’s something that’s going to continue to grow,” Brown says when asked about the pace of BNPL over the next few years. “It’s a very efficient tool for both the lender and the consumer side.”
Brown attributes the recent surge and future growth primarily to providers’ recent actions. “This is nothing new; it’s been around for decades,” Brown says of BNPL products, “but the degree to which BNPL providers have been able to reduce costs will go a long way toward expanding access to credit.”
“I don’t see BNPL financing slowing down,” said Nelly Lesney, SVP of Temenos’ Americas business solutions group, echoing most experts’ sentiments. “New entrants are joining the BNPL expansion, from traditional banks to credit card providers, to new fintech companies.”
Why consumer spending patterns will never be the same
The public interest in these products and services signals a dramatic, potentially long-term, shift in consumer behavior. Consumers no longer have to wait weeks or months to receive their online orders. With the click of a button, online purchases can be delivered to their door in one or two business days.
The convenience of modern shopping has effectively transformed the retail industry, making waiting weeks for online orders an outdated idea. The same is true in consumer lending: buy now, pay later allows consumers to skip the “saving period” before a purchase, and most apps don’t require a lengthy application process like credit cards or personal loans.
The ease and convenience of making four big purchases without going to the bank is exactly what Gen Z and millennial shoppers are looking for, Maslaveckas said.
“In our experience, many younger consumers are looking for alternative lending options that are more transparent and flexible than traditional banks. They want to get loans quickly and easily without having to go through complicated application processes or deal with high fees and interest rates,” he says.
But as BNPL products continue to grow in popularity, Maslaveckas says these loans can be a valuable tool for consumers if used correctly: “Having more choice as a consumer is always a good thing, as long as there are sufficient controls in place to deter bad actors.”
How Borrowers Can Protect Themselves
Sophoan Prak, a personal adviser at Vanguard, said consumers need to look at the terms of their contracts more carefully than ever before. From misleading disclosures to astronomical interest rates, these products could do far more harm than good if you don’t pay them off in full and on time.
Plak advises that BNPL users should fully understand the risks associated with these products before signing any agreements: “If consumers are looking to buy something they can’t afford, they should re-examine their budget to determine if it’s truly a reasonable purchase.”
“[Missing a payment]can really impact your credit score and your future financial situation if something unexpected happens, so I think people really need to be prepared for that from a planning perspective.” To avoid potential credit damage, she advises consumers to read the terms and conditions carefully before accepting any offer and find out whether the provider will charge interest or report you to credit bureaus.
Plak echoes the views of many financial experts in recommending that borrowers take a moment to think about what their budget is like, rather than jumping right into a loan: “[Heavy use of BNPL]can lead to behaviours that, once you’re in a debt cycle, can be very difficult to break out of,” he says.
After all, a solid budget and plan is the best way to protect your financial future. If you take out an installment loan, that’s not necessarily a bad thing. As long as you can repay all your installments in full and on time and are careful not to overborrow, it can be a great way to boost your credit score, as providers report your repayment history to credit bureaus.
