CFPB research reveals growing BNPL usage by subprime borrowers

Buy now, pay later (BNPL) is all the rage with consumers. An article in Forbes magazine at the height of the year-end holiday shopping season reported consumers were using BNPL loans "for everything from groceries and dining out to travel, technology and home décor." Fast growing BNPL companies, like Klarna and Affirm were bracing for records, driving $18.5 billion in online spend, a 11.4 percent increase over 2023, Forbes reported.

Now comes research out of the Consumer Financial Protection Bureau indicating BNPL is especially popular with consumers considered subprime borrowers.

The CFPB's research used data that is a bit dated; it's from 2022. That's because most lenders don't report these loans to credit bureaus in large enough numbers for external observers to measure key statistics, the bureau explained. The study released this week overcomes this data gap, however, by using a "matched sample" of BNPL applications and originations from the six-largest BNPL firms and corresponding credit records absent consumer names or other identifiable information.

In 2022, consumers took out more BNPL loans on average than in 2021, with a majority taking out multiple BNPL loans, the CFPB reported. The average number of annual originations per borrower rose from 8.5 in 2021 to 9.5 in 2022

Better than one in five consumers with credit records

More than one-fifth of consumers with credit records (21.1 percent) used BNPL loans in 2022. Nearly two-thirds of BNPL loans in that year went to consumers with low credit scores. Among applicants with subprime or deep subprime credit scores, 78 percent were approved for BNPL loans.

The research also revealed that more than three-fifths (63 percent) of BNPL customers held multiple simultaneous BNPL loans at some point during 2022, and a third held loans from multiple providers.

BNPL borrowers were also more likely than other consumers to have higher balances on other unsecured credit lines, such as credit cards.

Younger consumers are more apt to have BNPL loans. Among borrowers between the ages of 18 and 24, BNPL purchases made up 28 percent of total unsecured consumer debt during the month in which they took out BNPL loans, compared to an average of 17 percent among borrowers of all ages.

Keeping tabs on market

BNPL credit is a type of deferred payment option that generally allows purchases to be split into smaller installments, typically four or fewer, with a downpayment due at checkout. The application process is quick, requiring relatively little information from the consumer, and there are no interest payments provided the paydown occurs in the established timeframe.

Lenders often tout BNPL as a safer alternative to traditional credit card debt, as well as its ability to serve consumers with limited or subprime credit histories.

The CFPB limited its research to pay-in-four BNPL loans made by Affirm, Afterpay, Klarna, PayPal, Sezzle and Zip.

This is not the first action taken by the CFPB addressing the BNPL market. In May 2024, the consumer watchdog agency issued an interpretive ruling confirming that BNPL lenders must provide consumers with rights and protections that mirror those applied to conventional credit cards.

It also published research data in March 2023 about BNPL borrowers, and in September 2022, it released findings of an initial monitoring inquiry of BNPL companies.

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