Shoppers deal with holiday debt

When Kiki Andersen started holiday shopping late last year, she was having a hard time buying gifts for her loved ones. So she turned to a novel solution to get her through the season. It’s buy now, pay later.

The 31-year-old comedian from Los Angeles uses Klarna; PayPal Split your various purchases into four interest-free payments spread out over several weeks. At the time, her initial cost was about a quarter of her overall purchase price.

But now that January has arrived and the remaining installments have begun, Andersen doesn’t know how he’ll pay them back. She finds herself buried in a pile of microtransactions and wonders how she will cover her bills.

“I’ve definitely sold clothes…If I have to sell a pair of shoes to pay the bills, I’ll sell them,” Andersen told CNBC, in order to buy now and pay off the debt later. He talked about the approximately $1,700 he had saved. “I’m definitely worried. [the payments]. That’s definitely a concern and we definitely have to find ways to come up with money. ”

Andersen is one of the many Americans who decided to buy now and pay later for last year’s holiday shopping to avoid credit card debt, but now they’re struggling to make the payments.

At a time when persistent inflation and record high interest rates are driving many shoppers’ financial decisions, the service has fueled an overall boom in online spending, reaching an all-time high from November 1st to the end of December. reached $222 billion. During the season, ‘buy now, pay later’ usage hit an all-time high, increasing by a whopping 14% year over year, contributing $16.6 billion in online spending.

Adobe says that on Cyber ​​Monday alone, Buy Now, Pay Later usage jumped nearly 43%.

“Buy now, pay later could have driven some sales growth, especially online sales,” said Ted Rothman, senior analyst at Bankrate. “Many people are attracted to this financing method as an alternative to things like credit cards, where average interest rates are at an all-time high of 20.74%. Buy now, pay later still leaves you in trouble. Be aware that it can still encourage overspending and deceive yourself.”

The surge in buy-now-pay-later usage comes as credit card debt has reached an all-time high and delinquency rates have nearly doubled in the past two years. Delinquency rates have been at historic lows during the coronavirus pandemic, but the percentage of people who haven’t paid their credit card bill for more than 30 days has recently dropped, according to the Federal Reserve. , surpassed pre-pandemic levels.

It’s hard to say how “buy now, pay later” fits into this country’s overall debt picture. Providers offering this service typically do not disclose how often these bills go unpaid, and the debts are not reported to credit bureaus either.Klarna PayPal and agree with All told CNBC they refused to buy the stock now and pay late fees later.

Affirm said the short-term and fast nature of its “buy now, pay later” service makes traditional credit metrics less relevant. The delinquency rate for servicing is not disclosed because unpaid loans are written off within 120 days. The company discloses other credit metrics for long-term loans.

Klarna and Affirm previously told CNBC that their underwriting strategy ensures that only those who can repay short-term loans have access to the service. Because their business model won’t work if people don’t pay frequently. According to a review of the terms and conditions, Klarna charges late fees up to his 25% of the purchase price, while Affirm does not.

Klarna said its global default rate across its businesses, including ‘buy now, pay later’, is less than 1%. In the U.S., 35% of consumers repay the company early.

The uncertainty surrounding this new service has given rise to the so-called phantom debt phenomenon, and has economists, regulators and even shoppers concerned about its economic impact.

“It’s just a nebulous cloud of debt. No one really knows how it works and it’s just floating around us all the time, and it’s definitely contributing to the pending housing crisis. It feels like it’s pretty much the same as 2008 except for the shopping,” Andersen joked. “This is the myth that Klarna and PayPal are selling you, that you can have this lifestyle and you can have these things, but the truth is that you can’t have it. I can’t do that.”

Alaina Fingal, a New Orleans-based financial coach and founder of The Organized Money, typically receives calls in early January from people who overspent during the holidays and need help managing their finances. You will receive 5-6 emails.

This year it was closer to 20 or 25.

“Most people used up all their cash, ran out of cash, put it on a credit card, and once they maxed out their credit card, they turned to other services like buy now, pay later.” said Fingal. CNBC.

Ms Fingal said she spoke to one customer who was struggling to pay his bills because he had two maxed out credit cards and was using two ‘buy now, pay later’ services. .

“With these minimum payments, she is having a really hard time covering this month’s food costs and regular payments because she couldn’t afford it to begin with,” Ms Fingal said. “So it just becomes harder and harder to break out of this cycle.”

It’s unclear how often “buy now, pay later” bills go unpaid, but a 2023 study found that people who use them often default on other credit products, such as auto loans, personal loans, or mortgages. more than twice as likely to do so. Consumer Financial Protection Bureau. According to the CFPB, people who use the service tend to have higher balances on other credit products and lower credit scores.

As more shoppers use products, consumers are wondering how they feel about them. In the weeks after Christmas, some users of social media platform Some people spoke.

Others called this “dangerous” and vowed to stop using it as a New Year’s resolution. At least one shopper said he had to buy now and use his rent money to pay the bill later.

“Buy now, pay later is a beast. That’s true, but you have to be a bigger beast.” Loyal Klarna user Hensley Resiere said in response to the difficulties some shoppers are having with the service.

In an interview with CNBC, a 34-year-old refugee caseworker from Jersey City, New Jersey said: Khurana said she helped provide her family with an “amazing” Christmas. But when she first started using Buy Now, Pay Later during the COVID-19 pandemic, she struggled to keep track of her payments and found herself overdrafted by hundreds of dollars in fees. I was crushed by it.

“When I realized I could still get what I wanted, like designer items, and didn’t have to pay the full purchase price on the spot, I lost my mind…I felt like a kid in a candy store. ” Rezier recalls. “Let’s say Klarna gave me $1,000 and in my head I thought, ‘Oh my god, this is free money.’ So I paid for my rent, car payment, car insurance, I forgot about all the other bills, groceries, and everything else, so I spent the entire $1,000.”

Lesiere was stuck in a cycle of having to wait for payments to cover overdraft fees. Recently, we have implemented a system to manage payments so that they do not interfere with other claims.

“I’m in my career now and of course I’m making more money, but if there’s a way to split the payments and not worry about the bill, I’m definitely, definitely all for it,” Rezière said. “It doesn’t really feel that way because the payments are split. Yes, you’re paying the same amount, but the fact that it’s split doesn’t hurt as much.”

Branica Pride, a mother of three who lives in Birmingham, Alabama and works in higher education, told CNBC she uses Afterpay. blockis using the Buy Now Pay Later service. This Christmas, I’m going to buy my kids an ice machine, a PlayStation 5, and Drake concert tickets. She uses different providers depending on what the retailer offers. Ms Pride said the service came in handy this Christmas as she was reluctant to wait until the last minute to start shopping and pay for the entire purchase at once.

“I’ve used it before, but it wasn’t as heavy as this one,” she said, adding that she saved about $1,300 by buying now and paying off the debt later while on vacation. “I didn’t really get into the holiday spirit until the week of Christmas, so it was kind of funny that I was just shopping and at the end I was like, ‘Oh, I’m going to regret this this year.'” week. ‘”

Pryde said she has never had a problem with Buy Now Pay Later and typically uses the service around payday so she knows she will have the funds by the time her next installment begins. Ta. While she appreciates the flexibility it provides, she acknowledged that it can encourage overspending and get in the way of larger financial goals. Without it, she probably wouldn’t have purchased so many discretionary items.

“I say every year that I don’t want to start the new year,” Pride said. “But somehow it always follows me.”

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