Consumers are likely to utilize "buy now, pay later" payment arrangements significantly this Christmas season, which bodes well for businesses but raises concerns among credit experts.

Short-term loans sometimes have low interest rates and allow buyers to make an initial payment at checkout, then pay the balance in installments over a few weeks or even months. That can be enticing to a buyer who is buying many gifts for family and friends throughout the holidays, especially if they are juggling other debts like school loans or credit cards.

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Consumers are likely to utilize "buy now, pay later" payment arrangements significantly this Christmas season, which bodes well for businesses but raises concerns among credit experts.

A Boon for Consumers or a Path to Debt?

According to data, younger customers and those who have problems obtaining credit are the most likely to use the loans. The Federal Reserve Bank of New York said when used carefully, installment plans enhance financial inclusion. However, the Fed and several experts believe that crucial elements of the proposals may make borrowing too easy and burden consumers with excessive debt.

A recent Adobe Analytics analysis on online shopping showed that short-term installment loans contributed $6.4 billion in online spending in October, a 6 percent increase year over year.

Adobe anticipates that use will peak in November, with $9.3 billion spent, including a single-day record of $782 million on Cyber Monday. Adobe expects that one in every five Americans will use buy now, pay later arrangements to acquire Christmas items.

According to Vivek Pandya, lead analyst at Adobe Digital Insights, "rising interest rates, inflation in food prices, and resuming student loan repayments" have raised consumer costs, but "data has shown that the consumer remains resilient heading into the big holiday season, and (they) are embracing every opportunity to manage their budgets in more efficient ways."

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A Double-Edged Sword for Consumers and Merchants

'Buy now, pay later' loans have a common model. The lender does a mild credit check on applicants before requesting a down payment at the time of purchase, as well as a commitment to make four to six installments at two-week intervals, but conditions vary. Loans with no interest are a popular first offering.

Customers who pay late or miss payments, on the other hand, may be barred from using the app or incur interest or fines. These can be fixed sums as high as $25, or they can be computed as a percentage of the outstanding loan.

Merchants who are grateful for the additional business pay fees to pay-in-installment businesses. Customers who are given the opportunity to buy now and pay later are more likely to have larger cart sizes or to convert from browsing to checking out, according to retailers. The Fed cites research in its paper that shows customers spend 20 percent more when purchase now, pay later is available.

The majority of these short-term loans are unreported to the three major credit agencies. Customers love this because the loans have no effect on their credit ratings. However, it is this characteristic of purchase now, pay later that experts are most concerned about since it may lead to "loan stacking," or when customers take on debt with many lenders.

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