Delaying Payment, Courting Disaster: 'Buy now, pay later' companies advertise their products as safe alternatives to high-interest credit cards and payday loans. But consumer advocates warn that they can be a risky choice.

• Author: Berryhill, Nora-Kathleen

New generations of young Americans are finding themselves increasingly riddled with debt. There are the steep and, for many, insurmountable rental and mortgage rates in an extremely competitive housing market. There are the rising prices of basic consumer goods amid inflation at a forty-year high. There are the stagnating entry-level salaries for both the college and non-college-educated workforce. And, of course, there are the ever-climbing costs of higher education--only partially remedied by President Joe Biden's new debt forgiveness plan.

Despite these stressors, Gen Z-ers and younger millennials are still somewhat willing to splurge on entertainment, travel, and apparel. And, as in any situation where consumers' financial stability is tenuous but the incentive to spend is high, lenders are cashing in.

During the early days of the COVID-19 pandemic, when the online shopping sector boomed, consumers were increasingly served up an enticing option: For a fraction of the total cost, they could now choose to split an online purchase into a series of payments via an interest-free "buy now, pay later" (BNPL) loan through various third-party services. This meant that the initial charge for, say, a pair of luxury leggings could, at the click of a button, melt away from $99 into four monthly installments of $24.75. People could now more easily afford items that would otherwise be out of their budget, retailers could benefit from increased sales, and BNPL companies could profit from charging a fee to retailers, typically 2 to 8 percent of each sale made using these loans--slightly higher than the fees credit card companies normally charge.

The concept is nothing new; from Singer's dollar-a-week payment plan for its sewing machines back in the nineteenth century, to brand-name credit cards, to the layaway plans once commonly offered by brick-and-mortar department stores, delaying payment-in-full has always been an alluring option. But by essentially inventing a modern, "pay-in-four" installment plan version of these previous models, leading BNPL companies such as Affirm, Afterpay, and Klarna have successfully launched a global market that has been estimated to be worth $ 132 billion as of 2021, and is on track to reach $3.7 trillion by 2030.

From 2018 to 2021, the number of BNPL users in the United States rose by more than 300 percent each year, with a 2020 McKinsey & Company survey finding that "about 60 percent of consumers say they are likely to use POS [point-of-sale] financing over the next six to twelve months." And whereas BNPL's predecessors were designed with an eye for financing expensive investment items like furniture or technology, and even sometimes cars, with the average transaction value for BNPL loans being in the hundreds rather than...