Natalie Kitroeff: From The New York Times, I'm Natalie Kitroeff. This is The Daily. As Americans struggle with rising costs just about everywhere, they're increasingly turning to a new form of credit, buy now, pay later loans. Those loans have exploded since the pandemic, in part because they're easier to get and often cheaper than credit cards. And now, people are relying on them for everything from groceries to rent. Today, my colleague Stacy Cowley explains the draw and the hidden risks of buy now, pay later loans. And what their rise says about the state of the American consumer. It's Tuesday, September 8th.

Natalie Kitroeff: Stacy, welcome back to the show. I love having you here.

Stacy Cowley: Thanks for having me back to talk about debt again.

Natalie Kitroeff: Yes, the debt that we are here to talk about are these buy now, pay later loans. And I want to start by asking you to explain at a really high level what these loans are and why they've become so popular.

Stacy Cowley: So, these are very short-term installment loans that you can use when you're purchasing something at a retail checkout or online or just in your daily shopping needs. And they are typically very quick and easy to get. You can usually get approved for one within minutes. And they let you buy something and space out your payment for it over time. So, let's say you're going to buy a new pair of shoes. You can click a button and say, "Okay, I'm going to do a six-week loan and I will every two weeks pay a third of this and I will have it paid off in six weeks rather than paying for all of it up front right now." You can also download an app. When I was reporting this story, I went and downloaded some. I signed up with a firm. Five minutes later, I had a $6,000 credit line and a whole list of merchants I could go spend it at.

Natalie Kitroeff: Right. I have seen these in my online shopping being offered to me.

Stacy Cowley: Yeah, they're everywhere.

Natalie Kitroeff: But I always felt like that sounds a lot like a credit card. How are they different from a credit card?

Stacy Cowley: They are different from a credit card in a couple key ways. One is just the structure of them. So, when you use a credit card, you have one big line of credit, let's say $5,000. You make a bunch of charges, you get a bill next month, and you can choose to pay the whole thing off or carry some of it and pay interest on the balance. With a buy now, pay later loan, each transaction is its own individual discrete loan. So you buy the shoes, that's one loan with its own repayment schedule. Then you buy a sweater, that's a different loan with its own repayment schedule. Another difference is who can get these loans. Credit cards typically have higher underwriting standards. So, a lot of borrowers can't qualify for a credit card or can only get one with a very low credit limit. Buy now, pay later lenders generally don't do hard credit checks, and so it's much easier for people with low credit scores or thin credit files to qualify for these loans.

Natalie Kitroeff: And how many people are using them?

Stacy Cowley: Surveys show that somewhere around 15% to 25% of American adults say they've used a buy now, pay later loan in the past year. And that number is higher among younger consumers and lower-income households.

Natalie Kitroeff: Mhm.

Stacy Cowley: The other thing that's drawing attention is just how quickly these are growing. Back in 2019, right before the pandemic, Americans spent a couple billion dollars using these loans. Last year, that number was close to $100 billion.

Natalie Kitroeff: Okay, so really rapid growth in a form of credit that is going to people who may not be able to get other kinds of credit. How did we get here?

Stacy Cowley: So, these loans really started about 15 or so years ago in Europe and Australia. Companies like Klarna, which is based in Sweden, and Afterpay, which started in Australia. And they really took off in the US during the pandemic. Everyone was at home, e-commerce was booming, and retailers were looking for ways to get people to click buy on their carts.

Natalie Kitroeff: Can you just explain that? I know the pandemic was an economically difficult period, but the US government was also working to keep people afloat with these pandemic checks.

Stacy Cowley: Right. It was a moment when people were sort of unusually flush compared to how they usually are. They had stimulus checks, they weren't spending money going out or traveling, and they were bored and shopping online. And suddenly, at checkout, you have this option where instead of paying $200 for something right now, you only have to pay $50 today and the rest later. It made spending money feel frictionless. And retailers loved it because it increased basket sizes by 20% to 30%. They were willing to pay the fees to the lenders because people were spending more money.

Natalie Kitroeff: So, at this point in the history, it sounds like the massive growth in the loans is being driven by spending on things people want, not necessarily things they need.

Stacy Cowley: Totally. And that moment also coincided with the sort of takeoff, really, of influencer culture on social media.

Social Media User: Hi guys. So, I wanted to film a everything I bought this week video.

Stacy Cowley: People are looking on Instagram and TikTok.

Social Media User: So, I did a thing. Spent 190 pound on Shein.

Stacy Cowley: You would have people sort of bragging about, hey, I use Klarna. I went on a shopping spree and here's what I got.

Social Media User: I did a little Sephora order. I paid for everything through Klarna because that way you

Stacy Cowley: It became in the zeitgeist and kind of normalized that this was a way of paying for things you might want to go purchase.

Social Media User: Girl math is when you use Afterpay for literally everything.

Social Media User: If you have no money, but want some clothes, just smack it on the Klarna.

Social Media User: Life is too short to not experience thing because you don't have the money right now. Baby, put it on the payment plan.

Stacy Cowley: And then since then, that's when they started their sort of morph out into a much broader pool of retail options and shopping.

Social Media User: I used Klarna to buy my groceries from Aldi and this is everything that I got.

Social Media User: Pay your rent, pay your car note.

Social Media User: gotten my car fixed on Affirm and Klarna.

Social Media User: Groceries are expensive, but I got all of this today because I used Klarna.

Stacy Cowley: And that's been the thing that's been changing, especially this year. Not only are people really starting to use these loans for everyday essentials.

Natalie Kitroeff: Wow.

Stacy Cowley: This year, they started deliberately expanding into sort of a broader set of recurring monthly expenses, like utilities, medical bills, insurance, and even rent. There are apps specifically designed to let you split your rent into two payments, like a company called Flex, whose entire business model is helping you pay your rent in installments.

Natalie Kitroeff: So, it's expanded far beyond influencer culture. People are using it on basic necessities.

Stacy Cowley: Yeah. One person I talked to, one analyst was referring to this as the new working capital for the working class. Like the way a business uses a line of credit to manage cash flow and make payroll, working-class Americans are now using buy now, pay later to smooth out their cash flow between paychecks just to cover basic living expenses.

Natalie Kitroeff: And you've started to do this, but just walk me through how the companies that offer these loans make money off them.

Stacy Cowley: When they started to really take off, it was usually the merchants paying the fees. Right. But there's only two places for the money to come from: the merchant or the borrower. And as these loans expand into things like rent and utility bills, your landlord or the electric company isn't going to pay a fee to let you borrow. So, the model has shifted to charging the consumer directly.

Natalie Kitroeff: What does that look like exactly?

Stacy Cowley: So, typically, if you're going to use one of these, you're going to pay a small fee to borrow. Might be 5, 10 bucks to borrow a hundred dollars, or you pay a monthly subscription fee. For example, with an app like Flex for rent, you might pay a monthly fee of $15 or $20 to be able to use the service.

Natalie Kitroeff: That sounds like a kind of low fee overall. I guess I'm just wondering, how is this form of a loan different from a credit card?

Stacy Cowley: That's one of the selling points. Since these are typically small dollar loans, the fees are typically also small dollar amounts. Compared to a credit card that might charge a 25% or 30% APR that compounds month after month, a flat $10 fee on a short loan can seem much more manageable and predictable. But when you do the math on the annual percentage rate, paying $10 to borrow $100 for two weeks actually translates into a triple-digit APR.

Natalie Kitroeff: Okay, given that, this actually seems like a pretty good option if you need help with something like paying your rent. Is there a catch?

Stacy Cowley: Yep, there's a couple. One thing about these is that to get one, you typically have to give them your bank account information or a debit card, and you have to agree to automatic withdrawals.

Natalie Kitroeff: Meaning, basically, you're not choosing when to repay these loans like I am with my credit card, how much, when. These companies are taking the money directly.

Stacy Cowley: Yep, on the day the loan is due, it's coming straight out. Look, if you only have one loan, you can probably keep track of it. But if you have four or five or six different loans from different apps, it becomes really hard to manage.

Natalie Kitroeff: Mhm.

Stacy Cowley: And then, suddenly, you're seeing, "Oh my god, every couple days money's zapping out of my account. I can't keep track." And if the money isn't there, you get hit with overdraft fees from your bank, which can be $35 each time.

Natalie Kitroeff: Right.

Stacy Cowley: So, another catch is that these companies also typically do what's called a soft credit check. They're not doing a hard inquiry, and critically, they generally don't report these loans to the credit bureaus.

Natalie Kitroeff: Mhm.

Stacy Cowley: So, every lender is kind of making their own decisions in lending you money, and doesn't necessarily know what you've got going on with four other buy now, pay later companies.

Stacy Cowley: It can be easy to have them stack up and it can start to become a real cycle people get into where they start and then find they're taking out a new loan just to pay off the old ones.

Natalie Kitroeff: We'll be right back.

Natalie Kitroeff: Stacey, you said you've been talking to borrowers who've been taking out these loans. Talk to me about what exactly they're experiencing.

Stacy Cowley: I am working on an article about the rising use of buy now pay later products.

Stacy Cowley: So I spoke to a woman in Baltimore named Ashley Reed. She's a instructional aid in Baltimore City Schools and she's also an Uber driver.

Ashley Reed: I have been using buy now pay later products for quite some time. I want to say

Stacy Cowley: really stuck out to me as she kind of walked me through how she uses these in her monthly budget.

Ashley Reed: At first I would just use them for like small purchases. If I wanted an outfit or something like that and

Stacy Cowley: She was using buy now pay later loans at first just for a little online splurges.

Ashley Reed: later and then my mom had a brain aneurysm.

Stacy Cowley: That changed a couple years ago when her mom had a medical emergency and a whole bunch of expenses came with that.

Ashley Reed: And I wound up like maxing out my credit cards to pay for hotel rooms and ambulance services to get her transferred between hospitals.

Stacy Cowley: She had to travel to be with her mom in the hospital. There were lots of things that weren't being paid for. So she maxed out her credit cards.

Ashley Reed: That's when I really started to depend on the buy now pay later stuff because

Stacy Cowley: And suddenly these apps started to become a way to make her everyday bills. And pretty quickly in a matter of months, it escalated.

Ashley Reed: The buy now pay later is helpful but at times it's also stressful because I have to make this payment and I can't be late.

Stacy Cowley: So she talked to me about choosing to sometimes go late on her rent because her landlord's nice and she knows they'll be flexible, but she has to pay the app.

Natalie Kitroeff: And she has to stay in good standing with those companies to keep taking out those loans.

Stacy Cowley: Right, because if you are late on a loan, they will respond by freezing your credit line. You won't be able to borrow again, and she needs that borrowing power to get through the month.

Ashley Reed: So yeah, I feel like I'm constantly in like this survival mode.

Natalie Kitroeff: And how does she think about the decisions she's had to make, how she's gotten to this point?

Stacy Cowley: She said she would really caution people about starting to use these apps.

Ashley Reed: Don't get dependent on it like I have gotten myself dependent on it where I need it to survive.

Stacy Cowley: It's hard to see another option for her. I mean, even with all of the work she's doing, she's making a fairly modest five-figure income. When an unexpected expense hits—her car needs a repair, an electric bill is high—she doesn't have savings to fall back on, her credit cards are full, and this is the only place left to turn.

Natalie Kitroeff: And do we know how common this kind of experience is? I mean, you said I think 15 to 25% of Americans say they're using these loans. How many of them are in financial distress like Ashley?

Stacy Cowley: That's one of the challenges here. There isn't a lot of good data. Anecdotally, there's lots of reports out there about people getting into trouble. But because these loans mostly aren't reported to credit bureaus, they represent a kind of "phantom debt." Regulators and economists don't have a clear picture of how much of this debt exists. The Consumer Financial Protection Bureau (CFPB) has done some research showing that BNPL borrowers are much more likely to show signs of financial distress than non-users—they have higher credit card balances, more delinquencies, and lower liquidity.

Natalie Kitroeff: And is there any discussion in Washington about pushing for regulation around these?

Stacy Cowley: In fits and starts. There was starting to be a move towards that towards the end of the Biden administration. The CFPB issued a rule saying that BNPL lenders should be treated like credit card companies, meaning they'd have to provide standard billing dispute rights and disclosures. But the industry pushed back hard with lawsuits, and with the political changes in Washington, those efforts have largely stalled out. So right now, there is very little federal oversight.

Natalie Kitroeff: You know, Stacy, one of the questions I have about this is that from everything you've said, it seems like part of the reason these loans are taking off is because they are a coping mechanism for an affordability crisis.

Stacy Cowley: Yeah, that was what struck me in talking to consumers about this is that it was one thing when these were loans for people buying a nice pair of sneakers or concert tickets. But when people are turning to them for eggs, milk, and rent, it points to a much deeper structural problem. Even as inflation cools, the cumulative price increases over the last few years have left people with zero buffer. Wages haven't kept pace with the cost of everyday living, and people are using debt just to tread water.

Natalie Kitroeff: You know, it strikes me that as there's been all this discussion about the affordability crisis, Treasury Secretary Scott Bessent and others in Washington often point to strong consumer spending numbers as proof that the economy is booming and the consumer is doing great.

Stacy Cowley: [snorts]

Stacy Cowley: Right. There are two ways to look at that. One is that consumer spending is growing because people are feeling confident and have money. The other is that people are spending because everything costs 25% more, and they are using debt—including unmeasured buy now, pay later debt—to keep buying the basics they cannot do without. That looks like economic strength in headline GDP numbers, but it conceals deep vulnerability underneath.

Stacy Cowley: And the companies themselves are acknowledging it. When I talked to an executive at Flex, I asked him about this dynamic. He told me that they view what they're doing as "harm reduction." His argument was: if someone can't make rent, their alternatives are eviction or getting an predatory payday loan with a 400% interest rate. So an app that lets them split rent for a fee is, in their view, the lesser of evils.

Natalie Kitroeff: That phrase, harm reduction, it sounds like a recognition that the use of these things is just not a good sign about where the consumer actually is.

Stacy Cowley: That's how I took it. They can be more appealing and safer than other predatory options out there. But the fact that millions of people need "harm reduction" just to pay for shelter and food is the real takeaway about the health of the American economy.

Natalie Kitroeff: Well, Stacy, thanks for coming on the show.

Stacy Cowley: Thanks for having me.

Natalie Kitroeff: We'll be right back.

Natalie Kitroeff: Here's what else you need to know today. On Sunday, an Amazon cargo jet ran off the runway at Miami International Airport after landing from Guatemala City, sliding into a grassy area and prompting emergency responses and temporary runway closures. Federal authorities, including the FAA and the NTSB, are investigating the incident.

The mistrial came after a grueling 7 days and nearly 40 hours of deliberations by the jurors and multiple failed attempts by the judge to get them to a unanimous decision. In the end, 11 of the 12 jurors appeared to favor conviction, but without a unanimous verdict, the judge declared a mistrial, leaving prosecutors to decide whether to try the case for a third time.

Natalie Kitroeff: Today's episode was produced by Diana Wynn and Jack Disidoro with help from Olivia Nat. It was edited by M.J. Davis Lynn and Lisa Chow. Contains music by Marion Lozano, Dan Powell, and Diane Wong and was engineered by Alyssa Moxley. Our theme music is by Wonderly. That's it for The Daily. I'm Natalie Kitroeff. See you tomorrow.