Black Friday and Christmas tempt with offers. Many young people are taking advantage of the option to pay later. But this could become a real problem for many. Consumer advocates warn against using the option “Buy now, pay later.”
While shopping, especially young people utilize the “Buy now, pay later” option. This is especially attractive because you don’t have to pay immediately and can theoretically spend more money, as the bank or company charges you later.
But this trend is dangerous. Consumer advocates warn that especially young people are accumulating more and more debt. According to credit card balances of Generation Z and Millennials, the debt ratio is now 50% higher than in 2022. And yet, people continue to spend a lot of money. This is reported by the English-language magazine Fortune.com.
Young people are encouraged to buy more and sink into debt
What kind of option is this? “Buy now, pay later” seems very attractive at first: because you get the option to either postpone a payment or divide it over several months. Companies like Klarna or Paypal then offer you the option to pay later and charge little or no fees for it.
And according to data company Adobe Analytics, customers are spending 11.4% more this Christmas season when using the “Buy now, pay later” option compared to a year ago. How popular this option is demonstrated by a discussion on Reddit.com. One person writes:
I paid for it [my laptop] before the deadline and did not pay any interest. I can see how it is tempting for people to spend more than usual.
What are the advantages supposed to be? “Buy now, pay later” is particularly interesting for consumers with low creditworthiness or no credit history, such as younger buyers, as most companies offering this service only perform a soft credit check and do not report the loans and payment histories to credit bureaus, unlike credit card companies. However, this leads to several problems.
It also benefits retailers: In a report by the Federal Reserve Bank of New York, studies are cited showing that customers spend 20% more when “Buy now, pay later” is offered.
What is the problem? Consumer advocates warn that this postponement can significantly cost more money later. Because the buyer must also pay interest on the credit card used in addition to late fees, interests, or penalties for the “Buy now, pay later” credit.
Additionally, extra fees occur if one misses a payment. A vicious circle that is difficult to escape from in the end.
Consumer advocates also say that such payment options lead consumers to overwhelm themselves because they don’t have to pay the full price upfront, leaving more money available for smaller purchases.
And this leads to a much bigger problem: especially young people are spending money that they actually do not have. For example, Mark Elliott, Chief Customer Officer at the financial service provider LendingClub, explains:
The challenge is that this leads to excessive spending. The reality is that rising living costs and inflation have put more people in a situation where they are already reliant on revolving credit. The psychographics of ‘Buy now, pay later’ may be different – people don’t see it as debt – but it is.
A revolving credit is a credit that can be repeatedly obtained over a certain period. The maximum amount of the credit is pre-arranged with the banking institution or provider.
Despite high debts, many people continue to spend a lot of money
How bad is it currently? Emily Childers, a financial expert for the financial technology company Credit Karma, stated that internal data shows that the credit card balances of Generation Z and Millennials have increased by more than 50% since March 2022. At that time, the Fed, the American central bank, began to raise interest rates:
Young people are already in the negative this holiday season [Christmas time]. And based on what we see in the data, they are still burying their heads in the sand and spending money.
Rising interest rates are another problem that many people are currently facing. During the Corona pandemic, many young people were confined and bought their quality of life with loans. And this is now negatively impacting their situation, according to experts: Experts believe: Generation Z is struggling because it spent a lot of money at the wrong time
