Buy Now, Pay Later It’s not a boom, it’s a bubble, says a Harvard colleague

Most people love the convenience of buying now, paying later.

Since the beginning of the coronavirus pandemicinstallation payments have exploded in popularity along with an overall increase Online shopping.

Initially, by distributing the cost of a large ticket purchase, for example a groupfor example, it made financial sense, especially at 0%.

Now, according to Experian, 4 in 5 consumers in the U.S. use BNPL on everything from clothing to cleaning products, and most shoppers said buy now, pay later could replace their traditional payment method ( probably, credit cards).

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“It’s hard to buy something anymore without being asked if you want to pay over time,” said Marshall Lux, a colleague at the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School.

These days, most consumers will see a buy now, pay later option when shopping online at retailers like Target, Walmart, and Amazon, and many vendors are also introducing browser extensions, which you can download and apply to any online purchase. Then there are the apps, which allow you to use installment payments when buy things in personalso, just like you would use Apple Pay.

“Three years ago, people were talking about Peloton bikes, now people are buying sneakers, jeans, socks,” Lux said. “When people start buying household goods on credit, that signals a problem.”

When people start buying household goods on credit, it signals a problem.

Marshal Lux

Fellow at Harvard Kennedy School

Additionally, BNPL’s rapid growth is mainly driven by younger consumers, with two-thirds of BNPL borrowers considered subprime, Lux noted, making them particularly vulnerable to economic shocks or a possible downturn.

“These are the people who can’t afford to be hurt,” he said.

Additionally, nearly 70% of purchases now pay later, users admit spending more than they would if they had to pay for everything upfront, according to one. LendingTree survey.

In fact, 42% of consumers who took out a loan buy now, pay after they make a late payment on one of those loans, LendingTree found.

Gen Z is more likely to miss a payment and touch BNPL for everyday purchases rather than large items, according to a separate Piplsay survey site survey.

Typically, if you miss a payment, there may be late fees, deferred interest, or other penalties, depending on the lender. (Cnbc To select has a complete roundup of taxes, APR, if a credit check is performed, and if the supplier reports to the credit scoring company, in which case a late payment could also affect your credit score.)

Even if “they won’t come for your sneakers, the fact that you can buy something and not know what happens when you default – for the average person who works from pay to pay, that becomes a problem,” Lux said. “Seems like a little Wild West-y problem to me.”

Without much regulatory scrutiny, the BNPL market currently exists in “a legal gray space,” according to Lux.

“We test for stress,” he said. “It has the potential to be a pretty big bubble.”

The Consumer Financial Protection Office has opened an investigation in popular programs buy now, pay later.

The financial oversight body said it was particularly concerned about the impact of these programs on consumer debt build-up, as well as what consumer protection laws they apply to and how payment service providers collect data.

“Buy now, pay later is the new version of the old layaway plan, but with modern and faster twists where the consumer gets the product immediately but also gets the debt immediately,” the CFPB director said in a statement. Rohit Chopra.

The CFPB has not yet announced its next steps.

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