'Buy Now, Pay Later' Programs Resulting in Thousands of Dollars of Debt for Americans

by Riley Cook

Beware of the hidden costs of "buy now, pay later." Chantal Derrick, a 26-year-old UK traffic management worker, is sharing her cautionary tale after being ensnared by the allure of such platforms like Klarna and VeryPay, ending up almost $4,000 in debt.

Derrick confessed, "When you're young and careless with money, it's so easy to get sucked down the rabbit hole." She explains how these "buy now, pay later" (BNPL) models offer the temptation of instant gratification without the immediate full payment. Instead, customers settle the bill through small installments spread over time. For instance, on a $300 purchase, you might pay $75 upfront and then three more payments of $75.

Klarna, established in 2005 in Stockholm, Sweden, allows shoppers to pay in four installments and guarantees "no interest." As of 2021, around 60% of consumers have reportedly used BNPL services for their purchases, according to Bankrate.

Although many use this service responsibly, it can be a pitfall for individuals like Derrick, who admit to having a "bit of a shopping addiction." She emphasizes how this seemingly easy option can quickly lead to overwhelming debt, driven by the desire to keep up with trends. After confronting her debt, Derrick wisely paid it off and closed her BNPL accounts.

"The best thing I did was pay everything off and close everything down," she stated. Derrick now advocates for a more cautious approach to purchases. "Now if I want something I just buy it outright, and if I don't have the funds to pay it twice over, I don't buy it." Her advice to others is to be cautious when using the BNPL method and to steer clear of potential financial pitfalls.

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Klarna responded to these concerns, stating that they offer an "interest-free alternative to high-cost credit." The company asserted that they assess a customer's ability to pay for each transaction and impose restrictions after missed payments to prevent debt accumulation. The spokesperson pointed out that their default rate is less than 1%, substantially lower than typical credit card default rates.

Derrick's experience is not unique. Last year, digital entrepreneur Armani Bryan shared her own struggles with BNPL services, revealing that she fell into debt and suffered a poor credit score due to these platforms. Bryan voiced suspicions that such services rely on customers missing payments, enabling them to charge late fees and even report individuals to debt collectors.

These stories shed light on the potential risks associated with BNPL models and underscore the importance of being vigilant when navigating the allure of deferred payments. While these platforms can provide convenience, they should be approached with caution to prevent falling into a debt spiral. It's essential for individuals to carefully assess their financial situation and consider whether the instant gratification of BNPL is worth the potential long-term consequences.

Just like college students who are often tempted to apply for multiple store credit cards when they are young, these "buy now, pay later" services are targeting the most vulnerable individuals. More businesses—similar to store credit cards—are adding these services to their online stores to encourage shopping. Fingerhut, Bed Bath & Beyond, and Walmart are just a few that have joined the bandwagon. Not to be confused with layaway (the act of making payments on products not yet received), the BNPL service can prove itself to be detrimental to your budget and credit.