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Buy now, pay later (BNPL) has quickly become one of America’s favorite ways to pay, especially among young consumers. BNPL’s premise is simple: you get to split a big purchase into four equal interest-free installments, which are usually due every two weeks.
BNPL products are often marketed as a lower-risk alternative to credit cards — and they can be. But the illusion of inexpensive payments can make it easy to get carried away, resulting in loan stacking and financial risk. Luckily, there are some ways to fix it.
What is loan stacking?
Loan stacking is when you’re juggling multiple loans (or credit products) with the same characteristics and payment terms, simultaneously. According to a recent report by the Consumer Financial Protection Bureau (CFPB), loan stacking is one of the most common risks among BNPL users.
Unlike other credit products, which require a hard credit pull, BNPL platforms typically approve users based on a soft credit check. That means they lack visibility of the user’s true financial state and creditworthiness, as well as whether they have multiple concurrent BNPL loans with other platforms.
The lack of guardrails along with the initial payment requirement of 25 percent of the total purchase, make it easy for users to overspend, increasing their chances of default.
How stacking BNPL payments are affecting consumers
A new Morning Consult report found that — despite the fact that most BNPL users tend to have higher incomes ($50,000 and above) — they are more likely to have debt than the average consumer, across multiple categories. These include credit card debt, medical debt and student loan debt.
The higher debt loads among BNPL users may explain why many are having difficulty keeping up with payments. According to the report, one-quarter of BNPL users missed a payment in August. Out of those, 25 percent also reported paying late fees.
Additionally, 27 percent of the BNPL users who missed a payment in August, also saw a decline in their credit scores, while 22 percent said they’ve recently engaged with at least one debt collection agency.
Furthermore, one-third of BNPL users reported using their credit cards to pay off their BNPL balances, instead of their bank accounts, which could be a warning sign in itself.
“If their personal debt situation worsens, these figures could rise, creating real problems for these users at a time when interest rates are already high. This could lead to financial challenges among a population whose financial well-being shows signs of erosion,” reads Morning Consult’s report.
What do do if you’re struggling with your BNPL payments
If you’re already having issues keeping up with your BNPL payments, there are some ways you can get the situation under control, including the following:
- Seek a payment extension: Some BNPL platforms allow you to change — or extend your deadline, which can help you avoid a late or missed payment. For instance, Klarna offers a 14-day payment extension upon request.
- Contact your lender: If extending your due date won’t help solve your problem, the next step is to contact the BNPL lending platform and ask about any hardship programs they may have in place. This can be especially helpful, if your financial situation has changed significantly since you first took out your loan (hours reduction, loss of employment, etc).
- Use a credit card with a 0 percent introductory rate: If you have good credit and qualify for a 0 percent introductory rate credit card, you could transfer multiple BNPL balances into that account. This can buy you some additional time to pay off your balance, interest-free. However, you must be very careful and disciplined when using this option and make sure to not take on more debt while paying off your balance. Otherwise, you’ll be defeating the whole purpose of using the credit card and risk being in a worse financial position.
- Consider taking a personal loan: if you have multiple BNPL balances that amount to $1,000 or more, then applying for a personal loan can help you consolidate that debt and pay it off rather quickly. That’s because personal loans, particularly debt consolidation loans, tend to offer lower interest rates than most credit cards. That said, you must be very vigilant of your finances and not add any unnecessary debt to your portfolio once you take out the loan, to avoid long-term consequences.
The bottom line
It’s easy to lose track of your spending when using BNPL, but this can lead to financial trouble — especially if your financial circumstances change. If you’re having trouble keeping up with payments, there are ways to fix it, but you’ll need to be proactive for it to work.