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Is it safe to buy now, pay later?

ARI SHAPIRO, HOST:

The idea of buy now, pay later is changing how we shop. Companies like Affirm and Klarna let people pay for almost anything in installments, and it's having a big impact on holiday shopping. So what's the catch? NPR's Alina Selyukh reports.

ALINA SELYUKH, BYLINE: Think of it as an instant loan you can get for just a single shirt or a blender. Buy now, pay later is possibly the biggest trend of this holiday shopping season.

ELMY ESCALANTE: I'm looking at that for a little something for my sister, my mother.

SELYUKH: Elmy Escalante, from Southern California, first tried buy now, pay later during the pandemic to buy really fancy lounge pants. Instead of $140 upfront, she paid four installments of $35 each spread over six weeks. If you haven't done it, that's typically how it works. At online checkout, you choose one of these companies, like Afterpay or Sezzle, and they basically front your whole bill. You pay down a quarter, that first installment, and set autopayments for the rest, no interest, no credit history required. Escalante became a strong convert.

ESCALANTE: If a retailer doesn't offer that option, I don't shop with them.

SELYUKH: This sentiment is spreading fast. Between 2019 and 2021, the number of buy now, pay later loans grew almost tenfold. This month, one survey found twice as many people doing it than they did just in August. For many people, like Andy Arias from Los Angeles, it's a way to avoid credit card debt.

ANDY ARIAS: I wanted to keep my credit score as intact as I could in case of a real emergency.

SELYUKH: A short buy now, pay later loan usually doesn't ping your credit score as long as you pay on time. And so far, the vast majority of people do. Buy now, pay later has become a groundbreaking new option for people with no credit history or with bad credit, a way to spread a big purchase over time without rolling over a credit card balance that wallops you with huge interest. The big concern?

ARIAS: They do make it incredibly easy and tempting to make purchases. And if gone unchecked, it can be a little bit addicting, you know?

SELYUKH: It's an easy mind trick. I buy an $80 sweater today, but 60 of those dollars are a future Alina problem. And here's the thing - stores actually pay these financial companies to offer buy now, pay later. Now, why would they do that? At Harvard Business School, Marco Di Maggio and Emily Williams dug into the central question about buy now, pay later. Is it pushing people to overspend?

MARCO DI MAGGIO: This must be the case - right? - because the merchants are paying very high fees.

SELYUKH: Di Maggio says typically retailers pay around 2% for credit card companies to process transactions, but they pay about 8% to buy now, pay later providers - four times as much. And financially, that would only make sense if BNPL encouraged people to buy more. Di Maggio and Williams found not only do these borrowers spend more on average, they specifically shop more. Williams says, imagine you have $100 to spend on a shirt. Buy now, pay later lets you put down a quarter of that, 25 bucks.

EMILY WILLIAMS: So I've got this additional $75, and it's, you know, still in my shopping mental account. So I kind of - maybe I get the tie, maybe I get some socks, you know? Really, what I've ended up doing is kind of just spent $175 on shirts.

SELYUKH: And then you've got to keep track of all the upcoming payments. They are automatically deducted from your bank account, so overdraft fees are a common issue. Now more people are starting to do another financially perilous thing - putting buy now, pay later loans on their credit cards, paying for credit with higher interest credit that you still owe. People are ordering food delivery with buy now, pay later. They're buying gas and groceries.

ARIAS: Back in the spring, I did purchase a flight into London.

SELYUKH: Andy Arias made a last-minute decision to attend a wedding, thanks to 12 installments of about 120 bucks, feeling kind of weird flying in a seat he hadn't technically paid for yet. This holiday season, he is staying vigilant, limiting buy now, pay later to some big-ticket gifts for his nephews. Can't say what they are yet. Let's keep the surprise.

ARIAS: I'm trying to make sure that my nephews have what they need. And, at the same time, it's like, is this putting the carriage ahead of the horse? Would I have been able to do this, you know, without the buy now, pay later option?

SELYUKH: Arias says that is a conversation he has with himself often.

Alina Selyukh, NPR News. Transcript provided by NPR, Copyright NPR.

Alina Selyukh is a business correspondent at NPR, where she follows the path of the retail and tech industries, tracking how America's biggest companies are influencing the way we spend our time, money, and energy.
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