We’re beginning to get a clearer picture of Buy Now, Pay Later borrowers. While it has been long speculated that BNPL borrowers chose to use that option because of a lack of credit, the CFPB released a report based on data from their 2022 Making Ends Meet Survey which makes it clear that BNPL borrowers do have access to other credit, and they are using it. In fact, BNPL borrowers are more likely to “actively use other credit products” than consumers who don’t use BNPL loans. According to their analysis, 95% of BNPL borrowers “had at least one credit record in another account, compared to 86% of non-borrowers.”
BNPL Borrowers Have Lower Credit Scores
Another finding from the report is less of a surprise: BNPL borrowers have lower credit scores than non-borrowers. The average credit score of BNPL borrowers is in the subprime range. Typically, as the analysis notes, subprime borrowers encounter higher interest rates on traditional loans and credit cards, which makes BNPL products more attractive to those consumers.
The report did not lead the CFPB to any conclusions about whether BNPL use might lead to more delinquencies on the borrower’s other obligations, but they did note that BNPL borrowers are twice as likely than non-borrowers to be delinquent on one of their other credit obligations, like credit cards, personal loans, auto loans, student loans or mortgages.
However, as inflation remains high and despite a strong labor market, lower-income consumers (especially those with subprime credit scores) are feeling the pinch more than higher-income consumers. If those consumers are also overextending their financial situation using BNPL products, it’s easy to speculate that those borrowers will be impacted negatively in the event of a recession.
Credit Warping Remains a Concern
The findings also contribute to another ongoing concern in the credit world: credit warping. Consumers are not using only BNPL products or traditional credit, they are using both, and without accurate reporting from BNPL lenders, we still don’t have a clear picture of consumers’ credit health. This puts lenders in a perilous situation, since consumers’ credit scores are likely artificially inflated. Even if a potential borrower looks good on paper, it’s possible for the borrower to have many other open lines of credit through BNPL lenders which are not reflected on their credit report, and therefore invisible to traditional lenders, or even other BNPL lenders.
Consumers are at risk of becoming overleveraged, and that leaves lenders at risk of being unable to collect on delinquent accounts in the event of an economic downturn.
Other findings from the report include:
- Buy Now, Pay Later borrowers had significantly higher usage in several other loan products when compared to non-borrowers, including retail accounts (62% compared to 44%), personal loans (32% compared to 13%), and student loans (33% compared to 17%).
- Black, Hispanic, and female consumers are more likely than average to use Buy Now, Pay Later products, along with consumers with income between $20,001-$50,000.
- Eighteen percent of Buy Now, Pay Later borrowers had at least one reported delinquency in another account, compared to 7% of non-borrowers. Delinquency rates were substantially higher for credit (9%) and retail cards (8%) among Buy Now, Pay Later borrowers compared to non-borrowers (3% and 1% respectively).
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