Now that the industry is accumulating customers, arrears are rising. Inflation depresses consumers and makes it harder to pay off debt. Some borrowers do not budget properly, especially when persuaded to take out multiple loans, while others may have taken credit risks from the start.

“You have an industry with a higher concentration of subprime borrowers in a market that hasn’t been effectively tested (that kind of economy), and you have kind of a toxic brew of concerns,” said Michael Taiano, an analyst at Fitch Ratings. who co-authored a report in July highlighting some of the industry’s concerns.

The most popular type of buy-now-pay-later loan allows for four payments over six weeks — one payment at the time of purchase and three others that borrowers often try to sync with payment periods. Longer-term loans for larger purchases are also possible. Most short-term loans are interest-free. Companies that charge interest can clearly indicate up front how much a borrower will pay in financing costs.

Given these characteristics, consumer advocates and financial advisors initially saw “buy now, pay later” plans as a potentially healthier form of consumer debt if used properly. The biggest concern was late fees, which for a small purchase could represent a large financing fee if a borrower defaults on a payment. Fees can be as high as $34 plus interest. But now, as defaults rise and companies are more aggressive in marketing their products, proponents see a need for additional regulation.

The industry is growing rapidly, according to a report released Thursday by the Consumer Financial Protection Bureau. Americans borrowed about $24.2 billion for buy-now pay later programs in 2021, up from just $2 billion in 2019. That industry-wide number is expected to grow continues to rise. Klarna’s customers bought $41 billion worth of products globally through its service in the first six months of the year, up 21% from a year ago. PayPal processed more than $4.9 billion in buy-now-pay-later transactions in the second quarter, more than triple a year earlier.

Jasmine Francis, 29, a technology analyst from Charlotte, North Carolina, said she first used a buy-now-pay-later service to buy clothes from fast-fashion brand Forever21 in 2018.

“I remember just having a cart full,” she said. “At first I thought, ‘Something needs to go back’, and then I saw Afterpay at the register – you don’t pay for everything now, but you get everything immediately. That was music to my ears.”

It is unclear how healthy customers are in using “buy now, pay later” loans. Fitch found that arrears on these services rose sharply in the 12 months ended March 31, while arrears on credit cards remained stable. And according to the CFPB, a growing percentage of the loans the industry makes are being written off — or loans it deemed so delinquent that they were unlikely to be recoverable. The industry’s depreciation rate was 2.39% in 2021, a figure that’s likely higher now given the economic turmoil this year. In 2020 it was still 1.83%.

“This upward trend in late payments continues,” CFPB director Rohit Chopra said in an interview with reporters.

Credit reporting agency TransUnion found that borrowers who buy now, pay later use the product just as often as credit cards, adding to their debt. A Morning Consult survey released this week found that 15% of “buy now, pay later” customers use the service for routine purchases like groceries and gas, a behavior that’s raising alarms among financial advisors. The CFPB report also found that a small but growing number of Americans also use these products for routine purchases.

“If these ‘buy now, pay later’ plans aren’t properly budgeted, they can have repercussions throughout a person’s entire financial life,” said Andre Jean-Pierre, a former Morgan Stanley wealth advisor who now runs his own financial planning firm to help black Americans save and budget appropriately.

Another concern of advisors and consumer advocates, as well as lawmakers and regulators in Washington, is the ease with which consumers can top up these installment loans.

At a Senate Banking Committee hearing Tuesday on new financial products, Sen. Sherrod Brown, D-Ohio, touted the benefits of plans that allow consumers to pay for things in installments. But he also criticized the way the industry is pushing the plans.

“Ads are encouraging consumers to use these plans to make multiple purchases across multiple online stores — and rack up debt they can’t afford to pay back,” Brown said.

The short-term loans may be problematic as they are not reported on a consumer credit profile at Transunion and Experian. Additionally, the industry’s buy-now, pay-later customers are young — which means they have little credit history. Hypothetically, a borrower could take out multiple short-term loans via multiple buy-it-nows, pay companies later — a practice known as “loan stacking” — and they would never show up on a credit report. If a person puts too many items on “buy now, pay later” plans, budgeting could be difficult.

“It’s a blind spot for the industry,” Fitch’s Taiano said.

In a statement, the buy-now-pay-later industry trade group pushed back on characterizations that its products could burden borrowers with too much debt.

“With zero to low interest rates, flexible payment terms and transparent terms and conditions, BNPL helps consumers responsibly manage their cash flow and lead healthier financial lives,” said Penny Lee, CEO of the Financial Technology Association.

Meanwhile, providers of “buy now, pay later” services see rising defaults as a natural consequence of growth, but also as an indication that inflation is most likely to hit Americans, who will use these services the hardest.

“We’ve seen some strains (among those with the lowest credit scores) and they’re starting to have a hard time,” said Max Levchin, founder and CEO of Affirm, one of the largest buy-now pay later companies.

“I wouldn’t call it some sort of harbinger of a possible downturn, but it’s not the same kind of smooth sailing,” he said, adding that Affirm takes a more conservative approach to lending.

Buy now, pay later in the US after the Great Recession. The product, analysts said, was largely not tested during a major period of financial hardship, unlike mortgages, credit cards or car loans.

Despite these concerns, the consensus is to buy now, pay later. Businesses are here to stay. Affirm, Klarna, Afterpay, which is owned by Block Inc., as well as PayPal and others are now widely embedded in e-commerce.

In addition, the growth of the industry attracts more players. Tech titan Apple earlier this summer announced Apple Pay Later, which allows users to put purchases on a four-payment plan over a six-week period.

“I generally schedule purchases I make with PayPal ‘Pay in 4’ so that my purchase due dates end up on my payment dates since the due dates are every other week,” said Desiree Moore, 35, of Georgia.

Moore said she tries to use “buy now, pay later” plans to cover purchases that aren’t in her usual monthly budget so as not to take money away from her children’s needs. She has increasingly used the plans as inflation has made items more expensive and so far has been able to keep up with the payments.

Francis, the technical analyst, said it’s now common among her friends to use installment loans to pay for trips so they don’t drain their bank accounts completely in an emergency.

“If I come home from vacation and I have two flat tires and I’ve spent all that money on plane tickets, that’s $400 that you don’t have right now,” she said. “Most people have no savings. You have just enough for those flat tires.”