Struggling consumers are increasingly turning to high-cost credit for basic needs

Inflation — like the higher gas prices we’re paying because of ongoing geopolitical conflict — eats away at everyone’s budget. But for people already struggling to make ends meet, higher prices can force them to turn to debt to bridge a budget gap, which can become yet another financial burden.

New reports from the Kansas City Federal Reserve and Pew Research show struggling consumers are a lot more likely to turn to debt than those who aren’t struggling.

“Fifty percent of those who had trouble affording a basic necessity said that they borrowed money from friends and family,” said Juliana Horowitz, senior associate director at Pew Research Center. “About 30% of them said they took out a payday loan, compared to 4% of those who didn't have those challenges.”

Strapped families are turning to borrowing as inflation remains elevated, said Lisa Berdie, director of research at the Financial Health Network.

“When we talk about rising gas prices, or when we talk about rising prices at the grocery, this is really hitting financially vulnerable households, and they are trying to come up with the tools that they need to be able to cover those expenses.”

But taking on debt comes at a cost, with financially vulnerable households spending 17% of income on interest and fees, Berdie said.

One popular borrowing tool is buy now, pay later.

“We found that 29% of buy now, pay later users used the loans for groceries, and that is double the percentage from just a couple of years ago,” said Matt Schulz, chief consumer finance analyst at LendingTree.

While BNPL services often start off interest-free, many borrowers are paying late and incurring fees.

“All of a sudden that interest-free loan isn't free anymore, and you end up finding yourself stuck,” Schulz said.

It’s a dynamic Kayla Bruun with Morning Consult said she’ll be keeping an eye on this holiday season.

“The concern I think each year and I'm extra concerned for it this year, is if low-income adults have this available, they spend that, and then come January are there still going to be financial strains?” she said. It could make it harder for households to pay off holiday debt.