Buy now pay later services have exploded in popularity, with loans from the top five lenders skyrocketing from 16.8 million in 2019 to a staggering 180 million in 2021. The total value of these loans jumped from $2 billion to $24.2 billion during the same period, reflecting a fundamental shift in how we shop and pay.
We've seen buy now pay later apps particularly resonate with younger consumers, who make up 53% of BNPL users but only 35% of traditional credit card holders. However, this convenience comes with potential pitfalls - a 2024 Bankrate survey found that 56% of users experienced problems like overspending, missed payments, or purchase regrets. While these services typically charge no interest for pay-in-four loans, late payment fees can range from $2 to $15, making it essential for shoppers to understand what they're signing up for.
In this guide, we'll examine everything you need to know about BNPL in 2025 - from how these services actually work to the recent regulatory changes that might affect your shopping habits. Whether you're a frequent BNPL user or considering it for the first time, this information will help you make smarter financial decisions.
The fundamental concept of buy now pay later revolves around splitting purchases into smaller, more manageable payments. Unlike traditional credit products, BNPL acts as a point-of-sale financing option that lets shoppers walk away with items immediately while spreading costs over time.
In 2025, BNPL platforms have streamlined their processes significantly. When shoppers check out online or in-store, they select the BNPL option, complete a quick application, and receive an instant approval decision. Most providers now use artificial intelligence to assess creditworthiness beyond traditional credit scores, examining banking history, previous BNPL repayment behavior, and real-time financial data.
This approval process typically takes seconds rather than minutes or hours. Furthermore, many BNPL services now integrate directly with mobile wallets and banking apps, eliminating separate account management entirely.
The "pay-in-four" model remains the most popular BNPL structure, where purchases are divided into four equal installments paid every two weeks. Nevertheless, the market has evolved to offer various alternative payment structures:
This diversification helps BNPL providers accommodate different consumer needs and purchase types, from everyday items to big-ticket expenses.
The BNPL landscape features established fintech pioneers alongside newer entrants. Klarna, Afterpay, and Affirm continue dominating market share, each with distinctive approaches. Klarna emphasizes its shopping app ecosystem, Afterpay focuses on retail partnerships, and Affirm specializes in larger purchases with longer terms.
Traditional financial institutions have also launched competitive BNPL products, including major banks and credit card networks. Additionally, tech giants like Apple (with Apple Pay Later) and PayPal have leveraged their massive user bases to rapidly gain market share.
The explosive growth stems primarily from consumer preference for financial flexibility without traditional credit barriers. As merchant acceptance continues expanding across both online and physical retail, BNPL has cemented itself as a mainstream payment option rather than just an alternative financing tool.
Merchants across retail sectors are embracing buy now pay later despite fees that exceed traditional payment methods—and for good reason. The data reveals a powerful economic incentive behind this trend.
Although BNPL providers charge merchants significantly higher fees (typically 3-8% compared to 1.5% for credit card processing [1]), the increased sales volume justifies this expense. Studies show BNPL options boost retail conversion rates by 20-30% and lift average order values by 30-50% [2]. For example, clothing retailer Rue21 reported 73% higher average order volumes with BNPL transactions compared to other payment methods [2]. Essentially, merchants receive immediate payment from BNPL providers while transferring all repayment risk and fraud concerns to these third parties [3].
BNPL fundamentally alters spending patterns, primarily by psychologically reducing purchase barriers. Research confirms that consumers spend 6.42% more when using BNPL services [4], with installment pricing playing a key role in this behavior. Showing smaller installment amounts (e.g., "4 payments of $25") directly lowers consumers' perception of purchase expensiveness [5]. Moreover, consumers tend to make additional unplanned purchases when BNPL options appear at checkout, especially for low-ticket items where discretionary spending increases [4].
The structural differences between these financing options significantly impact usage patterns. Unlike credit cards' revolving credit model, BNPL provides simplified, fixed-term financing that appeals to younger generations. Indeed, in 2024, 54% of Gen Z reported using BNPL for holiday shopping compared to 50% using credit cards—marking the first time BNPL usage surpassed credit cards among this demographic [6].
A striking difference appears in consumer financial profiles: 71% of BNPL users revolve on their credit cards compared to only 40% of non-users [7]. Consequently, consumers with FICO scores below 600 are substantially more likely to use BNPL (23%) than those with scores above 800 (just 2.8%) [7]. BNPL also differs by offering interest-free installments without extensive credit checks, making it accessible to consumers who might not qualify for traditional credit.
Behind the convenience of buy now pay later services lurk significant financial pitfalls that many consumers discover too late. Understanding these risks and the evolving regulatory landscape is essential for responsible usage in 2025.
The psychological effect of breaking payments into smaller amounts leads many shoppers down a dangerous path. Nearly half (49%) of BNPL users report experiencing at least one problem with the service, with overspending (24%) topping the list of concerns [8]. Research indicates consumers spend 10-40% more when using BNPL compared to making single payments [9].
Simultaneously, younger consumers face the greatest risk—66% of Gen Z users report experiencing problems with BNPL [8]. Furthermore, many users accumulate debt across multiple providers, creating what experts call "phantom debt" that doesn't appear on credit reports [10]. This hidden leverage becomes particularly problematic as 34% of BNPL users have fallen behind on at least one payment [11].
Until recently, BNPL services operated in a regulatory gray area, resulting in:
Notably, BNPL loans typically aren't reported to credit bureaus, meaning other lenders cannot see borrowers' full existing liabilities when making lending decisions [10]. This increases the risk of overextension and eventual default.
In May 2024, the CFPB classified BNPL lenders as credit card providers under the Truth in Lending Act and Regulation Z [10]. This landmark rule required providers to investigate disputes, credit refunds for returned items, and provide billing statements [13].
Subsequently, New York state implemented first-of-its-kind legislation in 2025 establishing licensing requirements and capping interest on BNPL products at 16% [14]. The law also prohibits "unfair, abusive, or excessive" penalty fees [14].
Correspondingly, at the federal level, enforcement priorities shifted in May 2025 when the CFPB announced it would not prioritize enforcement of its 2024 interpretive rule [15]. This potential regulatory rollback raises questions about future consumer protections as the BNPL market continues expanding beyond its current relatively small size compared to the USD 17.90 trillion total U.S. household debt [10].
Beyond individual consumer risks, the unprecedented growth of buy now pay later services raises broader economic concerns that merit careful attention. As BNPL continues its rapid expansion, economists are increasingly worried about its potential ripple effects throughout the financial system.
The concept of "phantom debt" has emerged as a significant concern among economists. Since most BNPL providers don't report to credit bureaus, billions in consumer obligations remain invisible to traditional financial monitoring systems [16]. This reporting gap creates a black hole of information that obscures the true state of consumer finances. The BNPL market, valued at USD 30.38 billion in 2023, is projected to reach a staggering USD 167.58 billion by 2032 [17]. Meanwhile, global BNPL transactions are estimated to total USD 334 billion in 2024 alone [16]. Though current delinquency rates appear relatively low at under 2% [10], this hidden leverage could pose systemic risks if economic conditions deteriorate.
Most BNPL services operate outside traditional credit reporting frameworks, creating a paradoxical situation for users. While on-time payments typically don't boost credit scores, defaults can damage them if sent to collections [18]. Furthermore, research reveals a troubling pattern: BNPL users had an average of 0.93 credit card inquiries and 1.3 total inquiries in the prior year [19]. This suggests many BNPL customers are simultaneously seeking additional credit sources. Even more concerning, financially fragile consumers are almost three times more likely than financially stable ones to use BNPL five or more times annually [20].
The accelerating adoption of BNPL introduces complex economic implications. If BNPL leads to unsustainable consumer debt levels, it could trigger broader economic instability [21]. In fact, the Federal Reserve notes that if U.S. banks integrate BNPL into their credit cards, they could potentially elevate customers' credit limits from USD 856 billion to USD 1.27 trillion by 2025 [17]. Accordingly, regulatory bodies worldwide are increasingly focused on this sector due to concerns about market stability [22]. As one in five BNPL customers now uses these services for essential goods [16], the line between convenience and dependency continues to blur, potentially introducing new vulnerabilities into the financial system.
Buy now pay later services clearly offer appealing convenience and flexibility for modern shoppers. Nevertheless, this payment innovation comes with significant trade-offs that require careful consideration.
Throughout this article, we've seen how BNPL has transformed from a niche offering into a mainstream payment method worth billions. The appeal remains undeniable – instant gratification without immediate financial strain. However, the evidence shows these services fundamentally alter spending psychology, often leading users to purchase more than originally planned.
Most importantly, the risks cannot be overlooked. The alarming statistics reveal nearly half of all users experience problems, with overspending topping the list of concerns. Gen Z users face particularly high vulnerability, with 66% reporting BNPL-related difficulties. Additionally, the "phantom debt" phenomenon creates hidden financial obligations that traditional credit systems fail to capture.
Regulatory changes have started addressing these concerns, though consumer protections remain inconsistent. The CFPB's classification of BNPL lenders as credit card providers represents a significant step forward, but the partial regulatory rollback in 2025 raises questions about future safeguards.
For shoppers considering BNPL options, this reality demands a balanced approach. Before clicking that tempting "pay later" button, ask yourself: Would you make this purchase without financing? Can you confidently meet all payment deadlines? Have you tracked your total BNPL obligations across multiple services?
BNPL certainly has its place in the modern shopping landscape. Still, like any financial tool, its value depends entirely on how wisely you use it. Smart consumers treat these services as occasional conveniences rather than everyday payment methods – a distinction that might just save your financial future.
Q1. How does Buy Now, Pay Later (BNPL) work in 2025? BNPL allows shoppers to split purchases into smaller payments, typically over four installments. In 2025, the approval process is instant, using AI to assess creditworthiness beyond traditional credit scores. Many BNPL services now integrate directly with mobile wallets and banking apps for seamless transactions.
Q2. What are the risks of using Buy Now, Pay Later services? The main risks include overspending, debt accumulation, and potential damage to credit scores. Nearly half of BNPL users report experiencing problems, with overspending being the top concern. Additionally, many users accumulate "phantom debt" across multiple providers, which doesn't appear on credit reports.
Q3. How does Buy Now, Pay Later affect consumer spending behavior? BNPL tends to increase consumer spending. Research shows that consumers spend 6.42% more when using BNPL services. The psychological effect of breaking payments into smaller amounts often leads to additional unplanned purchases, especially for low-ticket items.
Q4. What consumer protections exist for Buy Now, Pay Later users in 2025? Recent regulatory changes have improved consumer protections. BNPL lenders are now classified as credit card providers, requiring them to investigate disputes, credit refunds for returned items, and provide billing statements. However, protections may vary by location and provider.
Q5. How does Buy Now, Pay Later compare to traditional credit cards? BNPL offers simplified, fixed-term financing without extensive credit checks, making it more accessible to some consumers. Unlike credit cards' revolving credit model, BNPL provides interest-free installments for shorter terms. However, BNPL may lead to higher spending and doesn't typically contribute to building credit history.
[1] - https://pirg.org/resources/the-hidden-costs-of-buy-now-pay-later/
[2] - https://www.cnbc.com/2021/09/25/why-retailers-are-embracing-buy-now-pay-later-financing-services.html
[3] - https://stripe.com/guides/buy-now-pay-later
[4] - https://theconversation.com/research-suggests-those-who-use-buy-now-pay-later-services-end-up-spending-more-246686
[5] - https://www.sciencedirect.com/science/article/pii/S002243592500003X
[6] - https://www.paymentsdive.com/news/gen-z-uses-bnpl-more-than-credit-cards-survey-shows/741139/
[7] - https://www.bostonfed.org/publications/current-policy-perspectives/2024/buy-now-pay-later-who-uses-it-why.aspx
[8] - https://www.bankrate.com/loans/personal-loans/buy-now-pay-later-survey/
[9] - https://www.forbes.com/councils/forbesfinancecouncil/2025/02/04/buy-now-pay-later-hidden-credit-risks-in-the-digital-payment-revolution/
[10] - https://www.richmondfed.org/publications/research/economic_brief/2025/eb_25-03
[11] - https://www2.deloitte.com/us/en/pages/advisory/articles/buy-now-pay-later-risk.html
[12] - https://www.nclc.org/cfpb-improves-protections-for-buy-now-pay-later-loans/
[13] - https://www.consumerfinance.gov/compliance/compliance-resources/consumer-cards-resources/buy-now-pay-later-bnpl-products/buy-now-pay-later-product-faqs/
[14] - https://www.consumerfinancemonitor.com/2025/05/23/new-york-gov-hochul-signs-legislation-that-includes-bnpl-licensing-requirements-and-other-consumer-protection-provisions/
[15] - https://www.hklaw.com/en/insights/publications/2025/05/cfpb-provides-status-update-regarding-buy-now-pay-later
[16] - https://fortune.com/2024/05/08/phantom-debt-buy-now-pay-later-consumer-finances-struggling/
[17] - https://www.fortunebusinessinsights.com/buy-now-pay-later-market-106408
[18] - https://www.consumerfinance.gov/ask-cfpb/will-a-buy-now-pay-later-bnpl-loan-impact-my-credit-scores-en-2117/
[19] - https://www.federalreserve.gov/econres/notes/feds-notes/the-only-way-i-could-afford-it-who-uses-bnpl-and-why-20241220.html
[20] - https://libertystreeteconomics.newyorkfed.org/2024/02/how-and-why-do-consumers-use-buy-now-pay-later/
[21] - https://councils.forbes.com/blog/the-surge-of-buy-now-pay-later
[22] - https://www.riksbank.se/globalassets/media/rapporter/staff-memo/webbrapport---pdf-dokument/2023/230905/buy-now-pay-later--a-threat-to-financial-stability.pdf
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