Beyond Convenience: What Buy Now, Pay Later Reveals About Financial Insecurity

Buy Now, Pay Later (BNPL) services have become a familiar feature of online shopping. With a few clicks, consumers can divide purchases into four interest-free payments over six weeks. The products are often marketed as budgeting tools—a convenient alternative to credit cards.

But new research presented during a recent webinar hosted by the Institute for Research on Poverty at the University of Wisconsin–Madison suggests a more complicated story. For many lower-income households, Buy Now, Pay Later is less about convenience than financial necessity, and its rapid growth offers an important window into the economic pressures many families face.

Alicia Lloro, a principal economist at the Federal Reserve Board, presented findings from the Federal Reserve’s Survey of Household Economics and Decision Making (SHED), which has tracked BNPL use since 2021. The share of adults using these loans has risen steadily, reaching 16 percent in 2025.

The strongest predictor of BNPL use isn’t simply low income, Lloro said. It’s financial fragility.

Consumers with lower credit scores, high credit card utilization, little emergency savings, and limited access to traditional credit are far more likely to rely on BNPL. Adults with less than $100 available in emergency savings were among the heaviest users.

The reasons consumers give for using the products reinforce that picture. Nearly one-third of users said BNPL was the only way they could afford a purchase, while another third said they needed to spread payments over time to manage cash flow.

Said Lloro: “Credit—and liquidity—constrained consumers are among the most likely to use Buy Now, Pay Later.”

Perhaps the most revealing finding involves what families are purchasing.

While clothing and electronics remain the most common categories, lower-income households are substantially more likely to use BNPL to pay for groceries and food delivery. That finding challenges the common assumption that these loans primarily finance discretionary purchases.

Even more troubling, nearly half of consumers who used BNPL for groceries or food delivery reported paying additional overdraft fees, non-sufficient funds charges, or late payment penalties. Although the loans themselves often carry no interest, automatic withdrawals can trigger expensive bank fees when families’ checking accounts run short.

For households already struggling to make ends meet, a product advertised as “interest free” can quickly become much more costly.

The webinar also highlighted implications that extend beyond everyday purchases.

Michael Neal, a senior fellow at the Urban Institute’s Housing Finance Policy Center, presented new research examining how Buy Now, Pay Later intersects with homeownership.

Because most Pay-in-Four loans are not reported to the major credit bureaus, mortgage lenders often cannot see these obligations when evaluating borrowers.

Using linked banking and credit bureau data, Neal and his colleagues found that homeowners increasingly rely on BNPL after financial shocks such as job loss. They also found that frequent BNPL users experience somewhat higher rates of mortgage delinquency during the first year after purchasing a home.

As Neal argued, “As Buy Now, Pay Later volume grows, it’s important that data sources are used to shed light on their consequences for mortgage finance.” He added that policymakers and researchers need to continue gathering evidence “toward improving transparency.”

Michael Collins, professor at the La Follette School of Public Affairs and School of Human Ecology, University of Wisconsin–Madison, shared findings from in-depth interviews with low-income mothers participating in the Babies First Years study. Although the research predates the rapid expansion of BNPL, it illustrates why many financially vulnerable households increasingly turn to fintech products instead of traditional banks.

Participants described abandoning banks after repeated overdraft charges, maintenance fees, and other unexpected costs. Instead, they pieced together financial lives using prepaid cards, digital banking apps, paycheck advances, money orders, cash, and mobile payment services.

Importantly, Collins emphasized that these consumers were making thoughtful—not reckless—financial decisions.

“Low-income consumers are pretty savvy,” he said. “They’re carefully monitoring what products are out there that meet their needs, and they’re quick to switch when they have a negative experience.”

The appeal of many fintech products, Collins noted, is not simply lower cost but greater predictability. Families living on tight budgets often value knowing exactly when fees will occur—or avoiding surprise charges altogether.

That presents policymakers with a difficult balancing act.

“Consumers are certainly navigating faster than regulators can keep up,” Collins said. Financial technology is creating products that meet real consumer needs, but oversight often lags behind innovation. The challenge, he said, is maintaining “guardrails…wide enough so that the market can innovate and consumers can find the products that really meet their needs.”