New research released by the Federal Reserve Bank of New York on Wednesday shows that Americans who are already having financial difficulties use “Buy Now, Pay Later” offerings more frequently. Almost all of them use the short-term installment payment programs five or more times a year.
In a blog post published on Liberty Street Economics on Wednesday, researchers from the New York Fed stated that people who are “financially fragile”—those with credit scores below 620, those who have been turned down for credit, or those who have fallen behind on a loan within the last year—are more than three times more likely to use BNPL frequently than other, more financially stable people.
Researchers at the New York Fed discovered last fall that the majority of BNPL program users—nearly one-third of the total user base—were individuals going through financial troubles and having the most unmet credit needs.
The most recent update, which was made public on Wednesday, concentrated on the intensity of BNPL consumption and was based on customer survey data that was gathered in October—before the expensive holiday season.
Approximately 60% of consumers who are financially precarious and have benefited from installment loans have done so five or more times a year, and approximately 30% have completed ten or more BNPL transactions. For users who are in a more stable financial situation, it compares to little over 20% and 10%, respectively.
Researchers noted in the post that “more-fragile households tend to use the service to make frequent, relatively small, purchases that they might have trouble affording otherwise.”
According to New York Fed data, a higher percentage of financially unstable BNPL clients—more than 62%—used the programs for purchases under $250, compared to 43.6% of other consumers. More financially secure people, however, use BNPL to make bigger purchases.
It was shown that 17.3% of BNPL customers who were financially secure and 4.9% of those who were not funded a purchase between $1,750 and $2,000.
Credit Concerns Are Raised by “Phantom Debt.”
These days, it’s commonplace to see Buy Now, Pay Later options that let customers pay in installments for anything from groceries to concert tickets, furnishings, travel, and even groceries.
In addition to enabling customers to “smooth out” certain transactions to better fit their budgets, BNPL providers claim that their products can be a more sustainable and safe substitute for traditional credit lines.
The issue of balance sheet leakage (BNPL) has drawn the attention of economists, attorneys general, and consumer activists. They point out that it is challenging to track and determine the exact amount of additional debt that consumers are taking on because of formal laws, a lack of data, and lack of transparency.
Researchers from the New York Fed stated on Wednesday that their most recent data adds to the evidence showing that BNPL is more appealing to those who would struggle to get credit and that using one of these installment loans for the first time is probably not going to be the last time.
“Across levels of financial stability, it is rare for people to use BNPL just once,” Researchers from the New York Fed stated. “Indeed, about 72% of financially stable users and 89% of financially fragile users have made multiple BNPL purchases over the past 12 months.”
