As 'buy now, pay later' plans grow, so do delinquencies

NEW YORK (AP) — Americans have grown fond of “buy now, pay later” services, but the “pay later” part is becoming increasingly difficult for some borrowers.

Buy now, pay later loans allow users to pay for items such new sneakers, electronics, or luxury goods in installments. Companies such as Affirm, Afterpay, Klarna and PayPal have built popular financial products around these short-term loans, particularly for younger borrowers, who are fearful of never-ending credit card debt.

Now, as the industry racks up customers, delinquencies are climbing. Inflation is squeezing consumers, making it tougher to pay off debts. Some borrowers don’t budget properly, particularly if they are persuaded to take out multiple loans, while others may have been credit risks to begin with.

“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,” said Michael Taiano, an analyst with Fitch Ratings, who co-wrote a report in July highlighting some of the concerns with the industry.

The most popular type of buy now, pay later loans allow for four payments over six weeks — one payment at the time of purchase and three others that borrowers often try to sync up with pay periods. Longer-term loans for bigger purchases are also available. Most of the short-term loans have no interest attached to them. Companies that do charge interest can clearly state upfront how much a borrower will pay in financial charges.

Given those features, consumer advocates and financial advisors initially had seen buy now, pay later plans as a potentially healthier form of consumer debt if used correctly. The biggest concern had been late fees, which could act as a hefty...