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How to make Buy Now, Pay Later deals work for you this holiday season

(SOUNDBITE OF SONG, "IT'S THE MOST WONDERFUL TIME OF THE YEAR")

ANDY WILLIAMS: (Singing) It's the most wonderful time of the year.

SARAH MCCAMMON, HOST:

And for many of us, it's also the most expensive time of the year. Holiday shopping is in full swing, and millions of Americans will be using a popular tool to finance their purchases. It's called buy now, pay later. When used with caution, it can help consumers manage their budgets. But there's also a very real danger of getting trapped in debt. To talk about that, Cora Lewis is with us. She covers personal finance for The Associated Press. Thanks so much for joining us.

CORA LEWIS: My pleasure. Happy to be here.

MCCAMMON: So, Cora, just remind us, what is buy now, pay later? How does it work? And can consumers pay for things later without actually paying more?

LEWIS: Buy now, pay later does tend to work the way it's marketed most of the time. So a consumer makes a down payment at the time of purchase and then makes an agreement to make between four and six payments at two-week intervals down the line. And they are typically zero-interest loans.

MCCAMMON: And, Cora, who are the typical consumers who tend to rely on buy now, pay later as a financing option?

LEWIS: Research has found that users of buy now pay later tend to be younger. They're more than twice as likely to be under 35, and they tend to be more economically fragile. So they might have subprime or near-prime credit scores, or they might have less good credit or no credit profile at all.

MCCAMMON: So some Black Friday deals are still going on, and we have Cyber Monday coming up. How much are consumers putting on buy now, pay later?

LEWIS: A lot - more than ever, in fact. Buy now, pay later products really gained a lot of popularity during the pandemic. They multiplied tenfold between 2019 and 2021, and this is predicted to be their biggest year yet. So in October, people spent $6.4 billion online with buy now, pay later. That's up 6% year over year. In November, that number should be 9.3 billion, with $782 million on Cyber Monday. So as many as 1 in 5 people plan to use buy now, pay later over the holiday season.

MCCAMMON: And why? Why is this becoming so much more popular?

LEWIS: I think there are a lot of reasons. Interest rates for credit cards are at record highs, and Americans are carrying more credit card debt than ever. Inflation is causing people to really stretch their budgets. Student loan repayments have restarted. And so what different analysts have found is that buy now, pay later is a way to let consumers balance some of these debt obligations that they have while still buying gifts or meeting basic household needs.

MCCAMMON: It's buy now, pay later, but not pay never. So how much time do you really have, and what are the penalties if you don't pay on time?

LEWIS: So one of the tougher things about this type of payment is that it can't really help you build credit, because positive payments aren't reported to credit bureaus, but it can hurt your credit. So if you do miss payments and you are delinquent or if you eventually default, that can show up on your credit score. Other risks include fees. Sometimes as you missed payments, those could add up to either a percentage of your purchase or kind of flat fees. And then the interest models are also different across companies, across purchases, so it can get pretty complicated pretty quickly.

MCCAMMON: So lots of things can go wrong. When does this kind of financing make sense? I mean, when can it actually work in your favor?

LEWIS: So if you are really on top of your budget and you know your cash flow, you know what your future economic situation is going to be, it can make sense. I think one thing about buy now, pay later is that merchants and retailers love it because people tend to buy more when they use these financing options.

MCCAMMON: So good for the companies, maybe not for the consumer, always.

LEWIS: I think that's what is going to have to be seen down the line in terms of the consequences of this new payment model. You know, will it be safe for the consumer? Will regulation kind of catch up to it, or will people be overextending themselves because the loan companies aren't talking to one another or reporting to the credit bureaus, which means that maybe people are able to sign up for credit more easily than they would if it were a more regulated form of credit?

MCCAMMON: Cora Lewis with the Associated Press. Than you so much for being with us.

LEWIS: Thank you so much, Sarah.

MCCAMMON: And happy holidays.

LEWIS: And happy holidays to you. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Sarah McCammon
Sarah McCammon is a National Correspondent covering the Mid-Atlantic and Southeast for NPR. Her work focuses on political, social and cultural divides in America, including abortion and reproductive rights, and the intersections of politics and religion. She's also a frequent guest host for NPR news magazines, podcasts and special coverage.
Lennon Sherburne