Younger consumers are flocking to a new type of payment called Buy Now Pay Later (BNPL), which allows them to pay in installments for things they need and want.

According to a July 2021 analysis conducted by Stash of more than 700,000 customers, BNPL usage increased more than four times in the seven months from January to July 2021, compared to the same time period in 2020. The amount customers spent with BNPL also surged more than eight times with five of the top BNPL services. 

However, it turns out millennials are the biggest users of BNPL, making up 58% of Stash BNPL customers. Meanwhile, Generation Z customers have seen the biggest surge in BNPL usage, with BNPL adoption climbing 130% among this age group year over year. 

And Stash’s findings seem to mirror more general consumer research. In a 2020 survey by credit card research company Cardify, 44% of respondents said that BNPL is somewhat or very important in helping them decide how much to spend during the holidays, one of the peak buying times of the year. Forty-eight percent of respondents also said that BNPL might prompt them to spend 10% to 20% more than they would on a credit card.

BNPL use and investing habits

Although there may be no definitive correlation, Stash’s survey found that, across all generations, BNPL users have 38% less money invested on average on the Stash platform than non-BNPL users. On average, for customers whose income ranges between $0 and $25,000, millennial BNPL users’ total Stash investments are 28% lower than millennials in the same income bracket who don’t use BNPL. Similarly, for customers whose income ranges between $25,000 to $50,000, total Stash investments for millennial BNPL users are 34% lower than millennials in the same income bracket who do not use BNPL.

Note: This data doesn’t necessarily mean that  BNPL usage directly causes lower levels of investment. Additionally, the patterns Stash found compared data during a time when Covid-19 has been taking a toll on the economy.

Methodology

Stash analyzed Buy Now, Pay Later usage among roughly 770,000 Stash customers from January to July 2020 and from January to July 2021, using anonymized and aggregated data from customers’ external banking transactional information via Plaid. For the purposes of this research, Stash looked at transactions made with leading Buy Now, Pay Later companies Affirm, AfterPay, Klarna, Quadpay, and Sezzle, and compared it with aggregated and anonymized banking transactional data from customers who did not use these services in the given timeframe. 

Why people use BNPL

BNPL can help shoppers plan their spending over the course of a few weeks or months. It can also make it easier for people without credit, or who don’t want to use a credit card, to pace their spending. While most BNPL companies don’t report to credit bureaus, preventing users from building credit with them, some experts say that credit bureaus may start including BNPL data in the future.  

The two biggest reasons why people use BNPL are because it may be easier to make payments, and because BNPL may offer more flexibility, according to data from market research firm C+R Research, based in Chicago, Illinois. BNPL lets people break purchases into installment payments, so they can chip away at an expense over the course of several months at a simple rate of interest. That stands in contrast to credit card charges, where consumers have to pay their balances off at the end of a billing cycle, or potentially pay a higher rate of interest on the remaining charges. This also means you can budget for how much of each paycheck will need to go to a BNPL payment. 

Simple vs. compound interest

BNPL also lets people buy something and pay it off, typically over a period of months, without having to accrue significant interest, in many cases. Some companies, such as Affirm, offer payment plans with simple interest, while others, such as Afterpay and Klarna, offer zero-interest plans. (As a reminder, interest is what a lender charges on a loan. The interest rate dictates how much you’ll pay in interest relative to the original amount lent, the principal.) 

With simple interest, the lender calculates interest based on the principal amount alone. With compound interest, the lender charges interest on the principal amount, as well as any previous interest accrued. So typically, simple interest may be more favorable to the lendee. The longer it takes you to pay off the loan, however, the more likely you are to have to pay interest. 

For people who haven’t had a chance to start building credit yet, or are rebuilding their credit, BNPL can be an alternative to a credit card. BNPL providers can give people without credit access to a loan. Afterpay, for example, reportedly instantly approves applicants without checking their credit score. Other options such as Klarna and Affirm perform soft credit checks. A soft credit check appears on your credit report when it’s checked for reasons unrelated to lending money, while a hard credit check appears on your report when your credit is checked for a new loan, credit card, or line of credit. A hard credit check usually temporarily lowers your credit score, but a soft credit check doesn’t. 

Follow the Stash Way

BNPL comes with pros and cons. Know the details so you can make strong financial decisions to benefit your bottom line.

Find out more about BNPL here.

If you decide to use BNPL, consider practicing good financial habits when you do. Consider only using BNPL for things that are already in your budget, and that you can pay off quickly without accumulating interest or late fees. Make sure you account for payments in your monthly budget, and make payments automatic. If you put your BNPL payments on a credit card, make sure to pay off your monthly credit card in full so that you don’t rack up interest or hurt your credit score.

And consider following Stash’s guidance for financial well-being, called the Stash Way. Build a budget that includes room for your expenses, savings, and investing regularly.