The festive season is characterized by joy, laughter, and, unfortunately for some, a financial strain due to gift purchases. Adobe Analytics reported a 43% year-on-year increase in buy now, pay later (BNPL) purchases on Cyber Monday. This rise in BNPL usage was fueled by consumers making larger purchases, as the number of items per order also increased by 11%. However, the growing reliance on these BNPL services, particularly within the African American community, is raising concerns about the potential financial implications.
The Breakdown You Need To Know:
Consumers don’t always realize BNPL, a new spin on the concept of layaway, is a form of credit or a loan, as they continue their holiday shopping. CultureBanx reported that while BNPL services are used across all demographics, data suggests a disproportionate usage among financially vulnerable individuals. According to research published by the New York Federal Reserve, many BNPL users are financially fragile.
The African American community, in particular, appears to be disproportionately affected by BNPL. According to the Consumer Financial Protection Bureau (CFPB), Black consumers are about 63% more likely to use BNPL platforms than white consumers. This statistic is alarming given the potential financial risks associated with these services. Despite BNPL attracting a broad base of users, including those with higher incomes and education levels, those with lower credit scores and unmet credit needs make up a significant share of all BNPL users.
Balancing BNPL Debt:
Among the different racial groups, Black and Hispanic consumers are more likely to use BNPL services than their white counterparts. With the BNPL market expected to reach $3.98 trillion by 2030, according to Allied Research, here-in lies the issue, because many consumers don’t fully understand this new form of debt financing, it’s easy to get caught up in a bad financial situation.
Currently, 27% of Black households are late on paying their debts. Lending Club’s Holiday Season report found that 37% of Americans plan to use financing such as personal loans, credit cards and buy now, pay later this holiday season, up from 34% in 2021. Last year alone, Americans spent $20.8 billion through these BNPL services, with purchases overall up 230% since the start of 2020, according to a study by Accenture
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Share prices of public “buy-now, pay-later” companies have been performing very well. Affirm’s stock is up more than 300% year-to-date.
Situational Awareness:
BNPL companies may offer a lifeline for consumers struggling to make ends meet, it also presents potential financial risks. For instance, one could have multiple BNPL loans with different providers, none of which appear on their credit report, leading to the potential for “loan-stacking”, which can lead to a debt spiral. Since many BNPL services do not report to the three main credit bureaus, this can hide a person’s true debt level.
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