BNPL Debt Could Fuel Debt Consolidation Loan Demand

Much has been made about how buy now, pay later (BNPL) debt will impact consumer credit, but the rising popularity of this accessible loan could have another meaningful effect: an increased demand for debt consolidation.

Debt consolidation loans — personal loans used to group multiple debt balances — could become a last, best resort for those who qualify.

“As lenders get a better feel for the full debt load, I believe there’s going to be an opportunity to actually consolidate some of these and actually put consumers in a better position,” says USAA head of product Scott Serpico. “By looking at those buy now pay laters, bring them together under one umbrella, and have one simple, lower-interest payment across all [of them], that would actually give consumers a better ability to manage those.”

Borrowers increasingly rely on accessible BNPL borrowing

Sure, BNPL micro-borrowing transactions are likely to eat into credit card use. That’s why you see traditional credit card issuers creating their own BNPL lines, to avoid losing market share.

But like over-leveraged credit card debtors, BNPL borrowers who fall behind on repayment could start resorting to a personal loan for a more realistic payoff. That’s what data from the Biden Administration-era Consumer Financial Protection Bureau (CFPB) foreshadows: More than 6 in 10 BNPL borrowers take out more than one loan at a time; the average annual number of loans per borrower approached 10 in 2022.

Unfortunately, the CFPB reported other worrisome BNPL trends, including:

• BNPL borrowers generally have higher balances on other types of consumer debt (as compared to non-BNPL-using peers).
• Approval rates are on the rise, in part because lenders provide counteroffers with less attractive terms if your soft credit check shows you might be a risky bet for repayment.

Of course, part of what makes BNPL so appealing to consumers is also what makes it risky: You can get one pretty easily, including via a soft credit check and without complicating a long application. Those are among the reasons for this product’s popularity, according to Bankrate’s new Buy Now, Pay Later Survey.

Getting a personal loan can be relatively more challenging — and might be especially difficult for some BNPL borrowers who haven’t yet gotten “credit” for positive payment histories. After all, the CFPB data also reported that more than 6 in 10 BNPL loans are taken out by folks with subprime (or worse) credit (FICO scores of 619 and below).

As Bankrate senior industry analyst Ted Rossman has written, BNPL’s “easy access to credit is a double-edged sword,” especially with the increased stakes of credit reporting.

The new relationship between BNPL repayment and credit reporting

Earlier this year, BNPL data made it onto more consumers’ credit reports — now they’ll be accounted for in new types of FICO credit scores, the credit scoring provider announced in late June.

As the major credit reporting agencies get set to ingest BNPL data, consumer behavior could change (read: improve) once people see these accounts land, perhaps with a thud, on their credit reports, as Deloitte has hinted.

However, don’t expect an overnight shift in the connection between credit and BNPL. Bankrate’s Rossman told the New York Times that seeing changes depends on whether more and more BNPL firms report to the bureaus and a majority of lenders consider the new FICO scores. It could be a years-long process.

Given the CFPB data, some BNPL borrowers will see their credit harmed, at least initially. Far more could see the opposite effect, according to an analysis by FICO and Affirm. After all, the lender has claimed that BNPL results in “three-to-four times lower” delinquency rates than credit cards.

TransUnion head of consumer credit education Margaret Poe also sees the upside for a majority of BNPL-using consumers.

“In this future state, once it starts being incorporated into scores, I think it could be really valuable to consumers because consumers are excited to try out new financial tools,” Poe says. “And if it’s something that maybe has a lower barrier to entry and a consumer can prove they can use it responsibly, pay it back on time, I think that’s fantastic. Another tool in the toolbox, I’d say.”

Personal loans a potential solution for BNPL borrowers

The typical short-term BNPL loan doesn’t charge interest and personal loans do — to the tune of 6.49% to 35.99%, among the best lenders in late July. Still, there are financial reasons to switch from the former to the latter:

• Fees can account for a significant amount of your BNPL loan amount, equating to a costly APR. Personal loan origination fees, meanwhile, are avoidable.
• Payment amounts could sneak up on you with BNPL. You could lower them and switch to a monthly cadence with a personal loan, albeit at the cost of accruing interest.
• Credit damage if you let your BNPL loan languish. Before June’s FICO news, this has long been the contradiction with BNPL and your credit: pay your debt on time and your lender doesn’t tell the bureaus; or fall behind in repayment and prepare to see a derogatory mark on your credit report.

Of course, your preferred buy now, pay later lender (if you have one) would prefer that you “refinance” your BNPL debt with them directly. Many firms are offering a larger and larger suite of loans that veer further and further away from the original four-in-six model. (That’s four payments over six weeks: one at checkout, followed by three biweekly payments.)

But banks, credit unions and online personal loan companies will undoubtedly be ready if BNPL borrowers come looking for a more a straightforward repayment.

Alliant Credit Union director of product Sean Briscoe thinks “it’s too early to tell” how BNPL debt will truly impact demand for debt consolidation. Still, he sees the warning signs that some consumers will find themselves in trouble.

“From a consumer standpoint, some of these things feel convenient, but it also is becoming pretty overwhelming for the number of options and to try to keep track of, ‘What am I actually paying for this? What are the terms and conditions? What’s the real cost? Are there fees, or are there not fees?’” Briscoe says. “That’s less clear when you’re making a transaction decision versus trying to do research on a home equity or personal loan or something like that. So I think time will tell.”

What’s your next step?

If you rely on buy now, pay later for routine or major purchases, budgeting your repayment is critical. It can help you stay organized and on track, particularly if you tend to borrow more than one BNPL loan at a time. Our guide to debt repayment can help.

Now, if you’re already feeling the heat of BNPL debt, you might consider a personal loan to lessen your financial stress. One benefit of these installment loans is their straightforward simplicity: take out a lump sum to pay off your BNPL (and other debt) and receive a single monthly bill each month until your balance hits zero. Consider other pros and cons of personal loans before proceeding.