‘How did I get approved for $30,000?': is buy now, pay later headed for a fall?

The Guardian

2 days ago

When Nicole Hartman purchased her home in Berwick, Pennsylvania, in 2019, the place needed remodeling.
The 44-year-old home help aide needed to replace the hot water heater, get two new appliances and fix a water issue, along with making the home more medically accessible for her children.
With loans taken out for the home itself, it was impossible for Hartman, 44, and her husband to get personal loans to cover the renovations, so for the first time in her life, she opened up credit cards. And after maxing out those cards, she went on to use Affirm, which offers buy-now, pay-later (BNPL) services that allow customers to pay out their purchases in installments.
By 2023, Hartman had $30,000 of debt on Affirm and $88,000 of credit card debt. Her household income is $150,000 a year.
'How I was able to, at one time, have almost $30,000 on Affirm is insane to me,' Hartman said. 'Like how did I even get approved for $30,000? It just blows my mind.'
Credit card debt has ballooned to more than $1tn in the US over the last several years, and consumer advocates are worried that the debt burden is even worse with the growth of BNPL.
'Companies like BNPL because it leads people to spend more and make things look more affordable than they are, by focusing people's attention on one-quarter of the price rather than the full price,' said Lauren Saunders, associate director of the National Consumer Law Center. 'It can lead people to take on more debt than they can really afford.'
In recent months, BNPL companies such as Klarna and Affirm have been expanding their reach across different retailers, partnering with companies such as DoorDash, Walmart and eBay so that nearly every purchase can be made using BNPL.
At the same time, the Consumer Financial Protection Bureau (CFPB), the US federal agency that was built after the Great Recession to be a consumer watchdog, has largely been gutted by the Trump administration. Last month, the CFPB said it wouldn't enforce regulation against BNPL companies that put them under similar regulations that credit card companies must follow.
BNPL companies say that their services offer a healthier alternative to credit cards because they are fixed terms and can be interest-free. And the BNPL companies are more accessible for those who don't have high credit scores as BNPL doesn't require the same hard credit score checks as credit cards. But easier access to credit often comes at a higher price.
'Each purchase is essentially a different line of credit, and so each has a different repurchase schedule. You buy something and every two weeks, you get a deduction from your bank account, and that can be difficult for people to manage,' said Ed deHaan, a professor at Stanford's Graduate School of Business. 'You can do what's called 'debt stacking': max out one BNPL, and go to another.'
Research that DeHaan and colleagues published in 2023 found that while many BNPL users were able to make their payments without problems, other users were prone to overspending with BNPL and started to see early indicators of financial distress, such as not paying down other credit balances, within weeks of using the services.
'What you need to think about is the rest of the consumer's portfolio. If they're making BNPL payments … maybe they're not paying off their credit card, maybe they're not paying their cellphone bill, and that's actually more concerning,' DeHaan said. 'They're essentially substituting one payment for another.'
The CFPB in January published a report showing that the majority of BNPL borrowers had multiple loans at once and were more likely to have higher balances on other forms of credit, such as credit cards.
Kelly Klingaman, a financial adviser in Austin, Texas, said that she often works with clients who have built up BNPL debt with purchases that they bought largely on a whim.
'It's offered to you anytime you check out now,' Klingaman said. 'You may not be fully aware of the total interest you're paying and how it may be really jacking down your overall finances.'
Now that BNPL can be used to make smaller purchases, like everyday groceries or necessities, data has shown more Americans may be turning to it for necessities.
In a recent survey from LendingTree, nearly a quarter of BNPL users in the US said they have used the service to pay for groceries. Four out of 10 users also said they've had a late payment on the platform.
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Data compiled by the Federal Reserve shows that about 68% of BNPL users with family incomes under $50,000 said that using the services were the only way they could afford their purchase. Only 32% of those with family incomes over $100,000 said the same.
And the service is used more by Americans with lower credit scores. Only 10% of those with credit scores above 720, which is considered to be a very good credit score, use BNPL, compared with 30% of those with credit scores below 620.
BNPL 'is promoted as purely free, interest-free, affordable payments that are ended fairly quickly. It could be useful for occasional larger purchases, but it's really quite ill-suited for everyday use. It makes no sense to put off three-quarters of the price of this week's groceries when you have more groceries to buy in the coming weeks,' Saunders said. 'It prompts people into spending more than they can really afford.'
In the first three months of 2025, Klarna said that its customer credit losses, which are due to late or missed payments, shot up 17% compared with the same period last year. The company absorbed $137m worth of these losses.
Overall, the company said it doubled its losses from the first quarter from $99m this year compared with $47m last year – reports about which led many on social media to believe that Klarna was going bankrupt.
But the company said that its losses stemmed from one-time costs, including from reducing its workforce by 40% after making heavy investments into AI. And the company actually saw its revenue increase 13%, to $700m, in the first three months of the year, compared with the same period last year, and its user base climbed 20%, to 100m.
In a statement to NBC News, Klarna said that the increase in consumer credit losses 'does not tell you much about the US consumer' and said that credit losses made up 0.54% of all 'gross merchandise value' for loans – a slight increase from 0.51% last year, 'but still very low', the company said.
Under the Biden administration, the CFPB had started to regulate BNPL servicers such as credit card companies, requiring that BNPL companies provide users with legal protections that are offered to credit card holders, such as the right to dispute charges.
Last month, the CFPB said it will no longer enforce these regulations against BNPL services, saying that it will 'keep its enforcement and supervision resources focused on pressing threats to consumers'.
Hartman said that while she was initially grateful that she was allowed access to more than $100,000 in credit, which she ultimately paid down completely, the process of learning how expensive it was to use such easy credit was painful.
'It's just so eye-opening how much interest you're getting charged on, for things you didn't really need,' she said. 'It helped us when we needed it, but we ended up paying probably twice as much than we needed to.'
Hartman said that self-education, including learning the dangers of easy credit, enabled her to pay down her consumer debt in less than two years.
'Had I been taught these things in school, I would have had a different outlook,' she said.