Buy Now, Pay Later Delinquencies Surge as Industry Booms

The checkout screen flashes an offer: split your purchase into four payments over six weeks, interest-free, starting right now. For millions of Americans, that prompt has become irresistible. The buy now, pay later industry exploded from a $2 billion market in 2019 to $24.2 billion in 2021, with companies like Affirm, Klarna, Afterpay, and PayPal building entire business models around the appeal of immediate gratification without immediate pain. The pitch is simple and seductive, especially for younger borrowers wary of traditional credit card debt: get what you want today, sort out the money later.

But the "pay later" part is proving harder than many anticipated. As the industry has boomed, delinquencies have climbed sharply. Inflation is squeezing household budgets. Some borrowers are taking out multiple loans without fully understanding their total obligations. Others were credit risks from the start. Michael Taiano, an analyst at Fitch Ratings, described the situation bluntly: an industry concentrated with subprime borrowers, tested in an economy it has never weathered before, creates what he called "a kind of a toxic brew of concerns."

The typical buy now, pay later loan works like this: one payment at purchase, three more spread over the following weeks, ideally timed to align with paychecks. Most carry no interest. The companies make money from merchants, not borrowers—at least in theory. Consumer advocates initially saw promise in the model. Late fees were the main worry, potentially reaching $34 plus interest on small purchases. But as delinquencies have risen and companies have grown more aggressive in their marketing, the calculus has shifted. The industry's charge-off rate—loans deemed so delinquent they're unlikely to be collected—jumped from 1.83% in 2020 to 2.39% in 2021, a figure that regulators expect has climbed further this year.

One invisible problem haunts the industry: these loans don't appear on traditional credit reports. A borrower can take out multiple installment loans across different companies and no lender will see the full picture. Credit reporting firm TransUnion found that buy now, pay later customers are using the service as heavily as credit cards, stacking debt on top of existing debt. A Morning Consult poll found 15% of users are now buying routine necessities—groceries, gas—on these plans, a pattern that alarms financial advisors. Andre Jean-Pierre, a former Morgan Stanley wealth advisor now running a financial planning firm, warned that unprepared borrowers face cascading consequences: "If these buy now, pay later plans are not adequately budgeted for, they can have a cascading impact across a person's entire financial life."

Senator Sherrod Brown, speaking at a Senate Banking Committee hearing, acknowledged the appeal of installment payments but criticized the industry's marketing. "Ads encourage consumers to use these plans for multiple purchases, at multiple online stores—racking up debt they cannot afford to repay," he said. The ease of layering loans is the blind spot. A person with little credit history—the industry skews young—could theoretically take out five or six short-term loans across different platforms and remain invisible to the credit system. Fitch's Taiano called it "a blind spot for the industry."

The industry's trade group, the Financial Technology Association, pushed back, arguing that zero to low-interest rates and transparent terms help consumers manage cash flow responsibly. Max Levchin, founder and CEO of Affirm, acknowledged stress among borrowers with the lowest credit scores but framed rising delinquencies as a natural consequence of growth and inflation hitting the most vulnerable hardest. He said Affirm is taking a more conservative lending approach going forward.

Yet the industry shows no signs of slowing. Apple announced Apple Pay Later in the summer, offering the same four-payment, six-week structure. Klarna's customers spent $41 billion on its platform globally in the first half of 2022, up 21% year-over-year. PayPal's buy now, pay later revenue more than tripled in the second quarter to $4.9 billion. For some users like Jasmine Francis, a 29-year-old technology analyst in Charlotte, the service solved a real problem: she discovered Afterpay at checkout in 2018 and could suddenly afford a full cart of clothes from Forever21 without draining her account. Others, like Desiree Moore in Georgia, use the plans strategically to protect emergency savings or avoid depleting funds needed for their children. Francis now uses the service for travel, reasoning that splitting plane ticket costs protects her from being broke if unexpected expenses arise after vacation.

But the industry has never been tested through genuine financial distress. Unlike mortgages, credit cards, or auto loans, buy now, pay later emerged after the Great Recession and has operated in relatively benign conditions. Now, with inflation eroding purchasing power and delinquencies rising, that test has begun. Regulators and lawmakers are watching closely, and the consensus among analysts is clear: these companies are here to stay, embedded now in the fabric of online commerce. The question is whether they'll remain largely unregulated as they grow, or whether the rising tide of missed payments will finally prompt the oversight that consumer advocates have been calling for.