Study Finds Buy-Now-Pay-Later Loans Are Expanding 'the Whole Credit Market'

A relatively new breed of small loans created by fintechs and offered by retailers is expanding the credit market, especially among young consumers, according to a study released Thursday.

TransUnion, the credit reporting agency based in Chicago, analyzed lending patterns of millions of people who applied for Buy-Now-Pay-Later loans — or Point-of-Sale (PoS) loans — and compared them to others seeking credit who did not apply for PoS loans.

Some have worried that these short-term loans might lead consumers into more debt than they can handle. Or, from some lenders’ point of view, that consumers would borrow more on these store plans and reduce their balances on their credit cards or other consumer debt.

Liz Pagel, SVP of consumer lending at TransUnion, said TransUnion’s survey disproves these worries.

“They don’t seem to be cannibalizing balances from other types of credit,” she said. “It’s an expansion of the whole credit market.”

A survey of PoS applicants found the most common reason they sought a Buy-Now-Pay-Later loan was to fit the purchase of an item they want into their budget. While they tended to hold more credit cards and other types of consumer loans, their delinquency rates were on par with other borrowers in their age and risk groups.

Pagel said credit unions might want to consider these consumers who borrow or apply for Buy-Now-Pay-Later loans.

“They are customers at credit unions; they are customers at banks,” she said. “These consumers might be in the market for credit.”

Buy-Now-Pay-Later loans have been around as long as appliance stores have sold refrigerators. And the category technically includes indirect car lending at dealerships and financing for solar panels or other home improvements sold by contractors.

Pagel excluded from her study larger-ticket loans like financing for solar panels sold by contractors to focus on appliance-scale loans and the new breed that are being offered by retailers through fintechs for small, routine purchases – usually under $500.

The fintechs typically charge retailers 2% to 7% of the price as a fee, and sell their loans to secondary markets that might buy unsecured personal loans.

Payments on the small loans are often made biweekly over eight to 12 weeks with the first payment made at the time of purchase. Buyers pay no interest on the small loans, while the interest costs are split on larger, more traditional Buy-Now-Pay-Later loans that usually carry terms of one to two years.

In some cases, the fintechs operate the loans more like the PoS systems used by auto dealers in which banks and credit unions become one of a list of potential lenders for car buyers.

These loans started online, but now many retailers are allowing customers to use them for in-store purchases.

Pagel said the concern among many lenders has been that these loans by fintechs such as Afterpay Limited, Affirm and Klarna were eating away at purchases on their credit cards and unsecured personal loans. They wanted to know if this new lending was a threat to fend off or an opportunity to enter.

“It started as a fintech movement and now more traditional lenders are interested in playing this game,” Pagel said.

Big players from Amazon to Square Inc. have decided to jump in.

Square Inc., founded in 2009 in San Francisco, announced Aug. 1 that it plans to buy Afterpay Limited of Australia in a $29 billion deal it expects to close in the first quarter of 2022.

Afterpay, founded in 2014, said it serves more than 16 million consumers and nearly 100,000 merchants globally, including major retailers in fashion, homewares, beauty and sporting goods.

Its website’s home page shows a young women looking at her mobile phone, and carries the words: “Shop now. Pay over 6 weeks. Never pay interest.”

TransUnion decided these new Buy-Now-Pay-Later fintechs were worth a closer look.

TransUnion analyzed the borrowing habits of 4.5 million consumers who made a Point-of-Sale inquiry, and followed them over six months. The inquiries tracked started in Oct. 1, 2019 and ended Dec. 31, 2020. The last six-month measures were in June 2021.

Each measure of PoS applicants was compared with a general borrower population within the same risk segment and age group. The study group was consumers with a hard or soft PoS inquiry from Oct. 1, 2019 to March 31, 2021. Their results were compared with other active borrowers in the same risk tier. The results presented in the study were of “near prime” consumers, who have credit scores of 601 to 660 on the VantageScore range of 300 to 850. Pagel said other risk tiers showed similar patterns.

TransUnion found:

• 54% of PoS financing applicants lowered their bank card balances in the six months following their applications, compared with 60% of people in the overall credit population.
• PoS applicants applied for credit at a higher rate than others in their risk tier.
• PoS applicants had significantly higher percentages of bank cards, store cards, installment loans and auto loans. They had slightly lower levels of mortgages.
• While 50% of active near-prime borrowers were age 50 or under, 78% of the PoS applicants were under 50.
• Six months after a PoS application, 3.2% of the applicants were 60 days or more delinquent on their bank credit card, compared with 2.7% of the general credit population. However, PoS applicants’ delinquency rate on unsecured personal loans was 3.7%, compared with 4.8% for the general population.