Buy Now, Pay Later Delinquencies Surge as Inflation Squeezes Borrowers

The checkout screen flashes a familiar offer: split your purchase into four payments, interest-free, with the first due today. It's a pitch that has become almost invisible in online shopping, so routine that millions of Americans barely register it anymore. But behind that seamless transaction lies a growing financial problem that regulators, consumer advocates, and the companies themselves are beginning to acknowledge: people are falling behind on these loans at an accelerating rate, and the system designed to help them afford everyday purchases is increasingly becoming a trap.

Buy now, pay later services—companies like Affirm, Klarna, Afterpay, and PayPal's installment offering—have exploded in popularity over the past few years, particularly among younger consumers wary of traditional credit cards. The pitch is straightforward: break a purchase into manageable chunks, often four payments spread over six weeks, with no interest attached. For someone buying new sneakers or electronics, it sounds like a reasonable alternative to carrying credit card debt. The industry has grown at a staggering pace. Americans borrowed roughly $24.2 billion through these services in 2021, up from just $2 billion in 2019. Klarna alone processed $41 billion in purchases globally in the first half of 2022, a 21 percent jump from the year before. PayPal's buy now, pay later volume more than tripled year-over-year.

But the growth has come with a troubling shadow. Delinquencies on these loans have climbed sharply, particularly in the year ending March 2022, even as credit card delinquencies remained relatively stable. The industry's charge-off rate—the point at which a loan is deemed so delinquent it's unlikely to be repaid—rose from 1.83 percent in 2020 to 2.39 percent in 2021, and analysts expect that figure to climb further as inflation continues to squeeze household budgets. Michael Taiano, an analyst at Fitch Ratings, described the situation bluntly: "You have an industry with a higher concentration of subprime borrowers in a market that hasn't been effectively tested through this type of economy, and you have a kind of a toxic brew of concerns."

Inflation is the immediate culprit. As prices for groceries, gas, and everyday goods have surged, consumers with tight budgets are turning to buy now, pay later not as a convenience but as a necessity. A Morning Consult poll found that 15 percent of buy now, pay later customers are now using the service for routine purchases like groceries and gasoline—behavior that alarms financial advisers. The problem is compounded by the structure of the industry itself. These loans typically don't appear on credit reports maintained by TransUnion or Experian, meaning a borrower could theoretically take out multiple loans across different platforms and never trigger a red flag on their credit profile. This practice, known as "loan stacking," is becoming more common. A borrower might have four separate payment plans active simultaneously across different retailers, each one invisible to the others, creating a cascading financial obligation that becomes impossible to track or manage.

Jasmine Francis, a 29-year-old technology analyst in Charlotte, North Carolina, remembers the moment the appeal first hit her. In 2018, she was at the checkout for Forever21, her cart full of clothes she couldn't quite afford. Then she saw the Afterpay option. "At first, I thought, 'Something's gotta go back,' and then I saw Afterpay at checkout—you don't pay for it all right now, but you get it all right now. That was music to my ears," she recalled. Years later, she and her friends have normalized using these services for major purchases like vacations, reasoning that spreading the cost across installments protects their emergency savings. But that logic breaks down when multiple purchases overlap, when inflation pushes prices higher, or when an unexpected expense arrives.

Desiree Moore, 35, from Georgia, tries to be disciplined about it. She times her buy now, pay later payments to align with her paycheck, and she uses the service primarily for purchases outside her regular budget so she doesn't shortchange her children's needs. But even she has found herself using these plans more frequently as inflation makes everything more expensive. She's managed to keep up so far, but she represents a narrowing margin of safety. Andre Jean-Pierre, a former Morgan Stanley wealth adviser who now runs a financial planning firm, warns that the cascading effect of unpaid installments can destabilize an entire household budget. "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," he said.

The industry's response has been defensive. Penny Lee, CEO of the Financial Technology Association, the industry's trade group, pushed back on criticism, arguing that the products help consumers manage cash flow responsibly. But lawmakers and regulators are unconvinced. Senator Sherrod Brown of Ohio, speaking at a Senate Banking Committee hearing, acknowledged the potential benefits of installment plans but criticized the aggressive 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 Consumer Financial Protection Bureau, under director Rohit Chopra, has flagged the rising delinquencies as a serious concern and signaled that additional regulation may be coming.

Max Levchin, founder and CEO of Affirm, one of the largest players in the space, acknowledged the stress appearing among borrowers with the lowest credit scores. "I would not call it a sort of preamble to a potential downturn, but it's not the same kind of smooth sailing it's been," he said, noting that Affirm is taking a more conservative lending approach. The irony is that buy now, pay later has never actually been tested through a serious economic downturn. The product took off after the Great Recession, meaning it has operated almost entirely in a period of relative stability and growth. Credit cards, mortgages, and auto loans have decades of stress-test data. This industry has none. And now, as Apple and other technology giants enter the market with their own installment offerings, the system is expanding just as its vulnerabilities are becoming impossible to ignore.