More Americans Are Expected to 'Buy Now, Pay Later' for the Holidays. Analysts See a Growing Risk

Consumers are expected to use “buy now, pay later” payment plans heavily this holiday season, a forecast that bodes well for retailers but that has credit experts again sounding alarm bells.

The short-term loans often come with consumer-friendly interest rates and allow shoppers to make an initial payment at checkout, then pay the rest in installments, typically over a few weeks, even months. That can be appealing to a shopper buying multiple gifts for family and friends during the holidays, particularly if they’re balancing other debt such as student loans or credit cards.

Data shows younger consumers and those with difficulty accessing credit use the loans most frequently. Used responsibly, the installment plans increase financial inclusion, according to the Federal Reserve Bank of New York. But the Fed and some analysts say key features of the plans can make borrowing too easy and saddle consumers with excessive debt.

Short-term installment loans drove $6.4 billion of online spending in October, up 6% year over year, according to a recent Adobe Analytics report on online shopping. Adobe expects usage to peak in November with spending of $9.3 billion, including a single-day record of $782 million on Cyber Monday. Overall, Adobe estimates one in five Americans plan to use buy now, pay later plans to purchase holiday gifts.

Vivek Pandya, lead analyst for Adobe Digital Insights, said that “rising interest rates, inflation in food prices, and resuming student loan repayments” have increased costs for consumers, but “data has shown that the consumer remains resilient heading into the big holiday season and (they) are embracing every opportunity to manage their budgets in more efficient ways.”