Buy Now, Regret Later?': DoorDash Will Let Americans Split Payments—But Experts Warn of Debt Danger

Buy Now, Pay Later (BNPL) apps are becoming popular among consumers looking to spread out the cost of expensive purchases. However, cash-strapped consumers are increasingly buying essentials on BNPL instalment plans due to the high costs of living amid elevated inflation.

From Affirm, Zip and Apple to PayPal, Klarna, and now Doordash, BNPL service providers are rapidly becoming the top choice for younger people looking to make purchases on credit. Doordash, a food delivery app, announced it has partnered with Klarna, which will allow users to eat now, and pay later.

BNPL services typically split a transaction into four or more instalments to be repaid in weeks or months. Consumers can easily open these accounts since applying doesn't involve a hard credit check. Users are also attracted to these schemes because they charge minimal interest rates.

Economists have begun to worry that the increase in BNPL scheme usage, given minimal regulatory oversight and inadequate transparency, makes it difficult to gauge how much debt Americans are really getting into.

While the US Federal Reserve tracks credit card loans and auto debts, BNPL data isn't included, as non-banking institutions offer these financing options and aren't properly reported to credit bureaus. Hence, no publicly available database of BNPL-related consumer debt levels, fees, interest rates, and delinquency rates exists.

'There's no question there's a big hole in our understanding of people's financial situations if you don't include Buy Now, Pay Later,' said Matt Schulz, chief credit analyst for LendingTree. 'And that's a problem for credit scoring companies, credit bureaus and for lenders.'

BNPL Transactions Top £77B Annually

It is estimated that BNPL transactions amount to £77.34 billion ($100 billion) annually. Analysts believe this figure could jump to £3.09 trillion ($4 trillion) in the following years.

The surge in industry growth without regulations as strict as traditional credit products has got economists and regulators concerned.

According to Kansas City Federal Reserve's Terri R. Bradford, a major downside of using these services is getting into debt easily without realising it since the instalments make it appear that a user is paying feasible amounts for the goods or services acquired.

'So the possibility is that you could, in your mind, think of everything that you're buying in those four instalments and, as a result, take on more debt than you would if you had to pay for them in full each and every time,' she said. 'The opportunity to stack your debt by using multiple Buy Now, Pay Later loans through multiple service providers is one of the biggest risks I see,' she added.

Solutions To BNPL Concerns Could Take Time

The Consumer Financial Protection Bureau initiated an inquiry into BNPL and has raised concerns about the opaque terms, possible data harvesting, and inadequate protections. The agency is expected to publish its findings later this year.

Although major credit bureaus stated they would begin including BNPL activity on credit reports, they still depend on the providers for that data. While some BNPL providers report payment history to credit bureaus, a proper solution for complete oversight of BNPL transactions could take time.

Former JPMorgan chief risk officer Marshall Lux believes that potential fixes might not come quickly enough as these BNPL options surge in demand and people's financial circumstances worsen, putting vulnerable Americans at risk.

'With everything going on in the economy, this is not getting the attention this deserves,' he said. 'Meanwhile, young people and the underbanked are being hurt badly, potentially ruining their credit for years to come.' He added that many BNPL users are primarily GenZ with credit histories deemed subprime. They are attracted to the services to avoid exorbitant credit card interest rates and buy products beyond their budgets. 'People are buying more than they should, and they admit it.'

The biggest red flag to Lux is what people are buying with these services and how customers can create 'a revolving cycle of more and more debt.'

However, BNPL providers believe their instalment plans are a more sustainable option than traditional credit lines. In an email, a Klarna spokesperson told CNN Business that their 'interest-free products are designed to keep people out of debt.'

'What it signals to me is this is a means to an end,' said Charlotte Principato, an analyst for Morning Consult. 'It's a considered choice about how to make money, go a little further and still achieve the goals that you want and still get the things that you feel like you need.'