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Having access to credit, or the ability to pay for things when you don’t have the cash, is a cornerstone of financial health. Personal loans and credit cards are traditional means to cover such costs, but increasingly popular buy now, pay later options make such credit available to people who might not qualify for the old standbys.
Americans have borrowed an estimated $385 billion in personal loans within the last 12 months, according to a NerdWallet survey conducted online by The Harris Poll from Sept. 30 to Oct. 4, 2021. The leading reasons for those loans were to consolidate debt (40%), cover the costs of a big event (39%) and pay for emergency expenses (35%).
Throughout this report, “recent” personal loan borrowers and buy now, pay later users refer to those who have used such a product within the past 12 months.
In contrast to personal loans, buy now, pay later installment loans might not be appropriate to cover the costs of a wedding or emergency bills — they’re generally intended for smaller purchases at checkout — but are expanding credit availability without a credit check by lenders. With a lower barrier to entry, more Americans used BNPL services than personal loans over the past 12-month period (37% vs. 29%), according to the survey.
“Financing options like personal loans and buy now, pay later services can help people accomplish big goals and spread out large purchases,” says Annie Millerbernd, a NerdWallet authority on personal loans. “But borrowers need to take a step back and make a plan to repay what is, in both cases, a debt.”
Americans took on an estimated $385 billion in personal loans over the past 12 months. Nearly 3 in 10 Americans (29%) took out a personal loan during that time period, borrowing $5,210, on average.
Loans reflect disparate needs. The reasons for borrowing illustrate how personal loans can be a tool suited to a broad range of purposes: 40% of recent personal loan borrowers did so to consolidate debt, 39% to cover the costs of a big event (e.g., a wedding or vacation) and 35% to pay for emergency expenses.
More Americans used BNPL installment loans than personal loans in the past year. Over the past 12 months, 29% of Americans took out personal loans, compared with 37% who used a buy now, pay later service. And 12% of BNPL borrowers used the service five or more times in that period.
BNPL is a booming industry. Affirm and Afterpay, two big players in the BNPL industry, boast 7.1 million and 10.5 million active customers in North America, respectively, according to annual reports. Those figures are up considerably over just the past few years.
Current state of personal loans
Americans took out an estimated $385 billion in personal loans from banks, credit unions and online lenders over the past 12 months.
Nearly 3 in 10 Americans (29%) have taken out a personal loan during this period, according to the survey. Millennials (ages 25-40) were the most likely to have done so — 52% of this generation did, while 41% of Generation Z (ages 18-24), 27% of Generation X (ages 41-56) and 9% of baby boomers (ages 57-75) did.
On average, those who took out loans borrowed $5,210.
A NerdWallet survey published in August 2021 found that 53% of Americans took on personal debt because of the pandemic. The findings of our personal loans survey reflect some of this pandemic-related borrowing — 35% of recent personal loan borrowers took out their loan(s) to pay for emergency expenses.
Taking out a traditional personal loan requires vetting by the lender, typically involving a “hard pull” of your credit history, which can negatively impact your score. Buy now, pay later services offer an alternative for people who want to make purchases right away without immediately available cash, or without the credit history needed for traditional loans.
Buy now, pay later: An alternative to personal loans
More than one-third of Americans (37%) have used a buy now, pay later service within the last 12 months, according to the survey. Three in 10 Americans (30%) have used it more than once, and 12% have used it five or more times during that period.
BNPL, also known as point-of-sale loans, allows borrowers to make a purchase and pay for it over time, often with no interest. Though not new, these services are growing significantly in popularity.
According to the 2021 annual fiscal report from Affirm, one of the most popular BNPL services, the number of active users of its service rose from just over 2 million in 2019 to 7.1 million in 2021, a two-year increase of 248%. Afterpay, a similar BNPL company that started in Australia and expanded into the U.S. in 2018, saw active customers in North America rise from 1.8 million in 2019 to 10.5 million in 2021, an increase of 483% during the same period.
“BNPL’s significant rise coincided with the height of the pandemic, when people were shopping online but maybe didn’t want to see a big purchase hit their bank account all at once,” Millerbernd says. “BNPL offered a solution right there at checkout with no hard credit pull, making it an easy and fast choice.”
Risks of BNPL
Because BNPL generally doesn't require a credit check and can be chosen at the moment of your purchase, it’s very convenient — possibly too convenient.
One-third of recent BNPL users (33%) say they elected to use the convenient financing option because it allowed them to purchase multiple items they wouldn’t otherwise have been able to get. Nearly 3 in 10 (28%) say they used BNPL because it allowed them to “splurge” on an expensive item they wouldn’t normally buy, and 27% say they used it because they didn’t have the money to pay for the purchase outright.
“The real danger in BNPL is that you could see your shopping cart split into lower, interest-free payments — rather than one big total — and buy more than you originally planned to,” Millerbernd says. “It could be far easier to overextend yourself when you’re not considering the all-in price.”
Most BNPL services don’t charge interest, but they do charge late fees. In fact, Afterpay collected $87 million in late fees worldwide in fiscal year 2021, an increase from $46 million in 2019 and $69 million in 2020, according to its annual reports. Afterpay charges up to $8 on late payments, though fees vary from one company to the next.
Which to use: BNPL, personal loans or credit cards
More than 1 in 4 recent BNPL users (26%) say they chose that option to help build their credit history, but not all BNPL services report on-time payments to the credit bureaus. Because they do report delinquent accounts, there’s a chance that BNPL services could hurt rather than help your credit, particularly if you overextend yourself by using them.
Buying something you can’t afford outright should be reserved for emergencies. But choosing the right funding option for other purchases can be difficult with ever-increasing options. Here are a few guidelines to follow:
Use a credit card when you’re in a 0% interest promotional period or can pay off the balance in full by the end of the billing cycle.
Use a personal loan when you need more time to pay off the purchase. A personal loan will generally come at a lower interest rate than the average credit card, particularly if you have good credit. And fixed monthly payments can be more predictable to budget.
Use BNPL for essential (not luxury) items. If you need a mattress or a refrigerator, for example, and are committed and able to make the necessary payments, BNPL is a simple way to spread out the costs a little. Make sure to choose one with no interest, and be cognizant of the fine print — late payments can harm your credit, and late fees could make it difficult to catch up if you get behind.