New findings link ‘buy now, pay later’ programs to borrowers using other credit products (including high interest loans)

Borrowers who use “Buy Now, Pay Later” (BNPL) programs are more likely to exhibit measures of financial distress than non-users, and they are also more likely to be active users of high interest products including payday loans, according to a new report issued Thursday by the federal consumer financial protection agency.

The Consumer Financial Protection Bureau (CFPB) said its findings show that BNPL borrowers are more likely to be highly indebted or have revolving balances or delinquencies on their credit cards compared to consumers who do not use the BNPL products. They are also more likely to be active users of other types of credit products like credit cards, personal loans, and student loans, the agency asserted.

CFPB Director Rohit Chopra said, in a statement, that it’s a “common misconception” that BNPL borrowers lack access to other forms of credit. “Our analysis shows that these borrowers are more likely to use other credit products,” Chopra said.

The report states that borrowers often exhibit higher measures of financial distress compared to non-borrowers. It states that examples include having higher credit card debt and utilization rates, a higher likelihood of having an overdraft, a higher likelihood of revolving on at least one credit card, and higher utilization rates of alternative financial services like payday loans that charge high interest rates.

However, the CFPB said the report finds that many of these differences pre-date BNPL use and “highlights the need for further research into whether the products have any causal impact on consumer indebtedness.”

Key points of its research, the bureau said, include:

  • 17% of consumers with a credit record used a BNPL loan in the year prior to the survey.
  • Nearly 95% of BNPL borrowers had at least one credit record in another account, compared to 86% of non-borrowers.
  • BNPL borrowers had significantly higher usage in several other loan products when compared to non-borrowers, including retail accounts (62% compared to 44%), personal loans (32% compared to 13%), and student loans (33% compared to 17%).
  • Black, Hispanic, and female consumers are more likely than average to use BNPL products, along with consumers with income between $20,001-$50,000.
  • Among consumers who have open credit or retail cards, personal loans, auto loans, student loans or mortgages, BNPL borrowers were more than twice as likely to be delinquent on at least one of those products by 30 days or longer.
  • 18% of BNPL borrowers had at least one reported delinquency in another account, compared to 7% of non-borrowers. Delinquency rates were substantially higher for credit (9%) and retail cards (8%) among BNPL borrowers compared to non-borrowers (3% and 1% respectively).
  • BNPL borrowers also typically had lower credit scores than non-borrowers. Non-borrowers had an average credit score classified as near-prime (670-739), while BNPL borrowers had an average score in the sub-prime category (580-669).

“Lower credit scores lead to higher interest rates on traditional credit products, which makes Buy Now, Pay Later loans with no interest an attractive alternative that many borrowers seek,” the CFPB said.

CFPB Publishes New Findings on Financial Profiles of Buy Now, Pay Later Borrowers

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