The transition of buy-now-pay-later (BNPL) lenders from helping out with minor purchases to being central to some consumers' finances reached a new point recently. "Now, lenders are offering the loans as a means for people to finance basic household needs," said The New York Times on Aug. 17.
Specifically, a few (so far) BNPL lenders are offering to help customers pay their mortgages, rent, and utilities. And that has some consumer advocates and debt counselors worried.
What Is BNPL?
BNPL lenders can largely offer whatever deals they like, although federal and state legislators are increasingly taking regulatory roles in the sector. However, typically, the basic concept is that a consumer borrows some money tied to a particular purpose, usually a purchase.
The loan is often initiated at an online or in-store checkout. It is typically free of interest charges and other costs — unless the borrower makes a late payment, in which case steep penalties are levied. In most circumstances, the consumer pays a quarter of the ticket price at the time of the transaction, and then three more payments to clear the balance.
BNPL lenders grew in popularity during the Covid pandemic and offered consumers a free way to spread payments on purchases without reaching for their credit cards. Originally, they were often seen as a painless way to buy small luxuries, such as fashion items, gadgets and electronic goods.
Roughly a year ago, your correspondent wrote an article for U.S. News. "To cover grocery costs, some consumers are using a payment method often associated with impulse purchases: buy now, pay later," he wrote. "In a recent survey of 1,000 American consumers from marketing agency PartnerCentric, nearly a third of respondents reported using BNPL for groceries."
Some saw BNPL being used for groceries as a danger signal for those consumers who did so. They perceived the creep from a handy loan for minor purchases to something some people were relying on for essentials as a very big deal.
And now that shift has moved further: into the fundamentals of a consumer's financial being, mortgage and rent payments.
What's the Problem?
Few would blame those who face a choice between putting food on their family's table and paying that month's mortgage or rent for making the choice to borrow. And BNPL is usually way better than a payday loan.
However, anyone making that choice should recognize that their financial situation is dire. Most Americans live paycheck to paycheck, so many of us are vulnerable to getting sick, being unemployed for a brief while, or sustaining a hit from an unavoidable major repair of a home or essential vehicle.
In those circumstances, doing some financial juggling is fine. It's when one repeatedly needs a BNPL loan to cover a mortgage or rent payment absent such a hit that one should worry.
Being in that situation often means one's spending more than one's making. And that's when turning to BNPL or earned wage access can lead to a debt trap. Things can only get worse until the overspending issue is addressed.
Wage Rises Lagging Price Rises
Again, this is nothing to feel guilty about. On Aug. 15, The New York Times noted that wage increases are lagging behind price rises.
That happened when the Covid pandemic fueled inflation, and it's happening again now. Many in the middle class are suffering from an affordability crisis.
The Times says such crises are historically rare. Usually, wages and prices rise in tandem, with just the occasional lag of a month or two as one catches up with the other.
"Then came the pandemic and the ensuing surge in prices, which led to the sharpest decline in inflation-adjusted wages since the 1980s," says The Times. "From February 2021 to June 2022, the buying power of the average American’s paycheck fell more than 4 percent.
"The latest shock, driven by the jump in energy prices tied to the war with Iran, hasn’t been nearly as severe," The Times continues. "But coming on the heels of the earlier decline in pay — and at a time when affordability and the cost of living remain top of mind for many voters — it has sent measures of consumer sentiment tumbling."
What's the Solution?
In David Copperfield, Charles Dickens put the following words into the mouth of Mr. Micawber: "Annual income twenty pounds, annual expenditure nineteen [pounds], nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought [shillings] and six [pence], result misery."
Readers may not be familiar with the currency or with the idea of getting by on 20 pounds ($27.11 at today's exchange rate) annually. After all, the book was written in England in the mid-1800s. But the central message is clear.
Still, there's an enormous gap between understanding that gem of wisdom and implementing it into a financial plan. Mr. Micawber himself spent his life waiting for a windfall that never came. And he spent time in a Victorian debtors' prison, something that existed back then.
So, Dickens wasn't making Mr. Micawber preach a morality tale. He was showing that Micawber understood that he needed to live within his means but couldn't do so. Dickens' own father spent time in a debtors' prison.
Luckily, things are just a bit easier today for those dealing with heavy debt. Most importantly, there are no debtors' prisons.
But also, today, debt counselors in non-profits can provide invaluable advice, and budgeting apps can make it easier to track income and outgoings. And mortgage lenders are often sympathetic to borrowers who are in financial trouble, provided they stay in touch.
Still, the most practical way to make up for an insufficient income in 21st-century America is the same as it was in Victorian London. Namely, to cut unnecessary expense.
BNPL may be the Band-Aid that gets one to the ER. But, sooner or later, more radical treatment is inevitable. And the longer one leaves it, the more painful it's going to be.
