Consumer credit plays two essential roles in our everyday lives. Instruments like credit cards make it possible for Americans to purchase everything from their daily latte to groceries and furniture with less friction, even if we have enough money in the bank. Beyond these smaller purchases, consumer credit also allows us to borrow to pay for bigger ticket items that may be too expensive to buy with their current resources. The second scenario can lead to a potentially dangerous expansion of household debt, which can trap some households in a debt spiral that’s hard to escape or have larger systemic effects.
This paper will consider the economic and policy ramifications of the current rapid expansion of one form of consumer credit, known as buy now, pay later (BNPL). Buy now, pay later loans serve as an alternative to traditional payment methods like credit cards when shopping online, allowing consumers to break up the cost of their purchase into several installments to be paid over the course of a few weeks or months, often with very low or zero interest. Understanding how this new form of consumer credit fits into the larger American economy is important, and this paper will explain why BNPL falls under the first category of consumer credit but does merit scrutiny and potential regulation as it continues to develop.
