Buy-now-pay-later financing can create ‘dangerous illusion’ that purchases are cheaper than they actually are

Credit cards, debit cards, and cash are still king among all age groups, the report finds. But younger customers, ages 18 to 44, are “the most enthusiastic adopters of BNPL services.” They have more accounts, on average, than older consumers. Plus, the millennials and Gen Zers signing up for these services are more likely to blow their budgets using them, and to miss payments.

Young people report using BNPL to avoid the high interest associated with credit cards—and that’s a good thing, says John Cabell, director of banking and payments intelligence at J.D. Power and the author of the report. But “they are often not paying off their buy-now-pay-later charges in a timely fashion, so they end up paying interest” anyway.

Many young people report not understanding how these payment methods work, which is how the trouble starts. And as offerings from companies like Affirm, Afterpay, Klarna, and others pop up on countless retailer websites and even in-store, it can get more difficult to keep track of the terms for every purchase.

It’s fairly easy to sign up for BNPL loans, and if consumers aren’t mindful about their spending, they can end up racking up more debt than they can afford to repay.In fact, the report finds, almost one-third of younger consumers say they spend more than their budget allows with BNPL.

“The simplicity of the interface combined with the immediate gratification these digital payment solutions provide is creating a potentially dangerous illusion that many purchases are either without cost or something to worry about later,” the report reads.

It can also be a challenge to track multiple accounts at once, especially if they are financed through different companies, says Cabell.

The BNPL industry has grown in popularity in the U.S. in recent years. Earlier this week, Apple announced it will integrate a BNPL feature into Apple Pay, potentially supercharging usage among those who use the payment option.

The results of J.D. Power’s report are in line with previous surveys, which find BNPL products can make it easier to fall into a debt trap, particularly among financially vulnerable or low-income households.

BNPL can’t be solely to blame for overspending: Younger consumers, who tend to have smaller budgets than older generations, also report higher rates of overdrawing their checking accounts when they use debit cards. But BNPL can compound the problem. Young people typically have tight budgets, and BNPL can obscure how much debt they are actually taking on.

“I do think there is something to the fact that it is becoming easier to click and make a payment,” Cabell says, noting that it’s more “painful” to pay for something in cash. “It could almost feel too easy.”

Still, when used strategically, these products can be a blessing—just like other financing tools, Cabell says. If a consumer needs to make a big purchase, like a dishwasher, but doesn’t have the cash on hand to buy it outright, BNPL can help that consumer spread out payments without racking up credit card debt.

“In a limited scale, in terms of the number of purchases you’re making, it can be a good thing,” he says. “But you need to make sure it fits in the overall framework of your budget and you’re positioned to actually make those payments to avoid interest.”