Would you take out a loan to buy this week’s groceries?
By Priya Krishna
Josh Roberts didn’t think twice about taking out a loan to pay for groceries. It was early in the pandemic, and he was making $16.50 an hour working for a technology company in Cincinnati while supporting his sister and her girlfriend.
“We were just not making enough to live,” he said.
So he started buying groceries online using a virtual credit card from Klarna, a “buy now, pay later” service that allowed him to break payments into smaller installments that could be made over several weeks, with no interest.
Soon, Roberts, 30, was regularly spending beyond his means on food — chicken breasts, bananas, chips, cereal. He fell behind on payments, and ended up owing more than $1,000 to Klarna, an estimated $100 of it in late fees. He already had about $11,000 in student debt, and another $2,000 in unpaid medical bills.
“I don’t want to be in debt for a carrot,” he said. “But you have got to do what you’ve got to do.”
When pay-later services such as Klarna, founded in Sweden, arrived in the United States about a decade ago, they were largely used for one-time, discretionary purchases such as concert tickets and high-end clothing. But as inflation mounts, Americans are increasingly turning to them to finance something much more mundane and essential: what they eat.
And there are signs that the use of these services for repeated, everyday expenses such as groceries and restaurant meals is pushing some users, particularly younger people who are already overextended, deeper into debt.
“If you are not financially literate, it is easy to abuse it and say, ‘I will just keep using it, it is free money,’” said Roberts, who has paid off his debt to Klarna and no longer uses the app.
Pay-later companies say their products are a convenient tool — like layaway plans or credit cards — to help consumers manage their finances in tough times. The services, with breezy names such as Zip, Zilch and Affirm, are easy to use, with well-designed apps, websites, virtual credit cards and widgets. Shoppers can apply for them in a checkout line and be approved in minutes.
Unlike credit cards, most of the services don’t charge interest or require applicants to undergo extensive credit checks. There is usually a processing fee for each purchase, typically paid by the merchant.
Pay-later companies are already commonplace in countries such as South Korea and Australia. Buoyed by inflation and the rise in e-commerce, they have quickly gained a foothold in the United States, where $45.9 billion in pay-later transactions were made online in 2021, up from $15.3 billion the year before, according to GlobalData, a data analytics company.
Food, which accounted for about 6% of those purchases, appears to be an important part of the growth. In the past year, Zip, a company based in Sydney, says it has seen 95% growth in U.S. grocery purchases and 64% in restaurant transactions. Klarna reports that more than half of the top 100 items its app users are currently buying from national retailers are grocery or household items. Zilch says groceries and dining out account for 38% of its transactions.
Zilch founder Philip Belamant said consumers don’t balk at swiping a credit card to buy lunch or coffee. So why shouldn’t they use a pay-later plan, with no interest, for those purchases?
“Why would you take a line of credit out to buy a sandwich?” by using a credit card, he said. “You are doing it today and paying 20% interest on it.”
But critics of services such as Zilch say their ease of use can lull shoppers into thinking they can take on more debt with no consequences.
“Buy-now-pay-later companies have really insidiously and ingeniously kind of like marketed themselves and advertised themselves as ‘I am just your friend, I am just here to help you out,’” said Jathan Sadowski, author of “Too Smart: How Digital Capitalism Is Extracting Data, Controlling Our Lives and Taking Over the World.”
A pay-later purchase is essentially a loan, he said, with its own pitfalls. Some services charge late fees that can exceed the interest charges on credit cards, according to a March report by Consumer Reports. Companies aren’t always transparent about the terms of using the service, and missed payments can hurt users’ credit scores.
Pay-later users tend to be economically vulnerable. A July report by the financial services company Fitch Ratings found that they carry more debt than the general population, and that more than 41% of applicants have a poor credit history.
The report showed that delinquency rates for some pay-later services more than doubled from June 2021 to March — from 1.7% to 4.1% at Afterpay, for example — while delinquency rates for major credit cards remained unchanged, at roughly 1.4%.
Pay-later services are less regulated than other forms of credit, and it is unclear exactly how many Americans are using them. The federal Consumer Financial Protection Bureau monitors firms that offer the loans and in December opened an inquiry into the business practices of five companies.
But Consumer Reports says many pay-later arrangements are designed to circumvent the Truth in Lending Act, which means they aren’t subject to the same disclosure protections as credit cards.
Dennis Cantwell and Monica Wong discovered that their San Francisco restaurant, Palm City Wines, offered a pay-later option when they saw a viral tweet in late June by a customer who joked about paying for a $19 hoagie in installments. The option had come with Palm City’s point-of-sale system; Cantwell said he missed an email telling him how to opt out.
The restaurant no longer offers Afterpay. If it did, Cantwell said, he would have to raise the price of small menu items by $2 to pay the processing fees.
A hoagie, he said, is “an old-school working-class item.” Financing one? “It seems so bizarre.”
Or maybe it’s not so far-fetched. Roberts, the grocery customer who got caught up in late fees, said he would rather shop for food at a dollar store than use a pay-later service.
Would he use one to eat out? “Maybe,” he said. “For a really nice meal.”