Buy now, pay later services, offered by companies like Afterpay, Affirm and Klarna, have become widespread over the past few years. Instead of paying the full cost of a purchase upfront, the buy now, pay later services allow consumers to pay in four interest-free installments, usually every two weeks.

Emily Stewart, senior correspondent covering business and the economy at Vox, wrote about the rise of buy now, pay later services and their potential downsides. The following is an edited transcript of her conversation with “Marketplace” host Amy Scott.

Emily Stewart: They do say, you know, it’s a 0% loan, you pay it back and everybody is happy. Obviously, if you miss a payment, you get hit with a late fee. Or you miss a payment, and suddenly it dings your credit. And there’s evidence that people miss payments quite often. I think another thing to know about these things is that merchants that are selling, you know, whatever the product is, they pay a higher fee to buy now, pay later companies than, let’s say, a credit card. But you buy more stuff when you’re doing buy now, pay later because it feels like you’re spending less money. So maybe that $100 would hurt. But if it feels like you can pay $25 over a few months, it doesn’t hurt as much, and you don’t think about it as much.

Amy Scott: Right, and with the economy pretty strong, despite inflation, you know, most people who want a job have one, pay has been rising, not as fast. But I wonder what happens if this kind of payment plan has grown in popularity when the economy turns.

Stewart: Right. And that’s certainly a concern. And you’ve seen some of the valuations of these companies coming down as these concerns start to rise among their investors, who are saying, “Wait a minute, how many people aren’t going to actually be able to pay you back?” Because what happens with a lot of these companies is they do a soft credit check or they don’t look superhard at whether or not you’re going to be able to pay this back. And so what happens? They wind up with more and more consumers who are maybe doing loan stacking, and they have five, six, seven different of these buy now, pay later loans. These companies don’t know, and they don’t know that they’re dealing with consumers that can’t pay them back.

Scott: What do we know about people who use these services and their credit quality, so to speak?

Stewart: I mean, we do know that they tend to be younger. A lot of them are people of color. Some of them have subprime credit. And what buy now, pay later businesses will tell you is that they’re offering financial inclusion, right? They’re extending credit to people who couldn’t get that elsewhere. But it’s not entirely clear how much that’s the case. One study from TransUnion found that buy now, pay later customers tend to have more credit products. So these are people who are taking out a lot of lines of credit, and maybe people who are a little bit in over their heads sometimes just because they’re not quite thinking about what they’re doing. It’s really tempting. Like, I was at the doctor’s office last week, and I got an offer to pay in four installments from my doctor — which was wild. Like, I’ve never in my life seen anything like it. And it was attractive. It was a second where I was like, “Oh, maybe I could do it.” I don’t need to do it, but you can see where you can kind of get swept up in this pretty quickly. And, like I said before, there really is evidence that people buy more things when they have this option.

Scott: It’s interesting you saw this at the doctor’s office. I’ve also seen reports that more people are using buy now, pay later for things like groceries, at restaurants. I mean, are you seeing a shift in how people are using this when they shop for not just, you know, things they want, but things they need?

Stewart: Right. Well, especially as prices do go up and you do see people start to struggle to spend on basics. You know, we are going to start seeing people pay more with credit cards, or if you do get the buy now, pay later option, to pay with that. I mean, there is an extent where we are generally seeing household balance sheets hold up pretty decently. But as prices rise, especially if there’s a recession on the horizon, people are going to become more stretched. And so inevitably, you’re going to see people putting more things on credit cards, using buy now, pay later if and when they can, just to get the basics.

Scott: As you write, regulators are starting to pay more attention to these companies. The Consumer Financial Protection Bureau is looking into several of them. What are the concerns?

Stewart: I mean, I think a lot of the concern here is really just, you know, there’s a, there’s really a tough line between what’s predatory and what’s progressive. And the experts that I talked to, you know, kind of said the jury’s still out on these things, on whether they’re good, they’re bad. And this is just really a regulatory gray area where eventually the regulators will probably catch up. The question right now is what happens in the meantime until they do and what happens if people really start to get into trouble with a bunch of loans that they maybe shouldn’t have been able to take out in the first place.

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