“Buy Now, Pay Later” loans are helping to fuel a record-setting holiday shopping season. Economists worry they could also be masking hidden financial risks for Americans. These loans, which allow paying in installments, have become popular due to high prices and interest rates. Retailers use them to attract customers, but some think they encourage excessive spending in young and low-income groups. These loans aren’t captured in public data and could pose a risk to the financial system if unregulated. Although consumer credit measures indicate financial health, it may not capture the fastest-growing pay-later market. Credit card borrowing is at a record high but stress is especially evident among younger adults. These financial difficulties have been encouraged by the recent surge of “Buy Now, Pay Later” services. These services are similar to older layaway programs and are popular among younger Americans. People often get into debt and overspend, especially during the holiday season, leading to further financial complications. Pay-later services expect shorter loans and assess borrower capability, making it easier to accrue debt. Klarna, one popular such loaning service, acknowledges that users could misuse their loans and that the company takes measures to restrict such use. As the use of pay-later loans increases, so does the risk of overdrawn bank accounts. Financial advisers are noticing more low-income clients use these loans. While these services could be important for communities without access to traditional loans, proper regulation is needed to prevent the misuse of pay-later options.
