The holiday season is creating record demand for buy now, pay later products from consumers looking to leverage their spending power and better manage their cash flow.

Holiday season shoppers are projected to spend $18.5 billion using buy now, pay later services, an 11% increase from last year, according to some projections.¹

A type of installment loan, the products are offered by retailers through third-party platforms such as Klarna, Afterpay, and Affirm. Consumers can break up purchases into four installments with little or no interest and fees — if payments are made on time.²

The average monthly spend of a buy now, pay later user is $295, according to Empower Personal Dashboard^TM data from October 2023 to October 2024.

Read more: The rise of "buy now, pay later"

Online shopping continues to be a driver of growth in the maturing industry, with Cyber Monday, which is the Monday after Thanksgiving weekend, projected to account for $991 million in purchases.³ Respondents to a recent survey cited freeing up cash (22%) and buying items that would be otherwise unaffordable (19%) as the top reasons for using pay later products during the holidays.⁴ 

What are consumers buying? Clothing, accessories, furniture, appliances, and electronics such as laptops and phones will make up the bulk of spending, according to an analysis of user data.⁵

Shoppers aren’t just buying gifts this holiday season. About 25% of consumers continue to see pay later options as a valuable tool for groceries and other essentials, according to a holiday survey by Affirm.⁶

Expanding options

Some 15 million people used pay later options for groceries in 2023, a trend fueled by post-pandemic inflation and higher prices.⁷

The most frequent pay later users have lower credit scores and carry credit card debt from month to month, according to a study from the Federal Reserve Bank of Boston. The study found that 71% of buy now pay later users had revolving card debt in 2023.⁸

Pay later options saw rapid growth from 2019 to 2021 as an attractive alternative to high-interest card lending, especially among younger consumers.⁹  But both pay-later apps and credit cards are changing in a bid to attract more shoppers looking to stretch their spending power.    

Dozens of banks including Citigroup, JPMorgan, and U.S. Bank have started offering card holders the option of converting already-made purchases into no-interest installment plans.¹⁰

Many of the bank offerings convert a portion of the customer’s existing credit line into payment plans. Consumers can pay off their monthly card bills on time while financing bigger items over time.¹¹

The pay later trend has also spilled over to debit cards as banks look to attract and retain new customers. JPMorgan Chase offers a product that allows customers to split debit card purchases up to $400 into four equal transactions to be paid over eight weeks.¹²

Washington is also blurring the lines by attempting to regulate pay later products much like credit cards. New rules from the Consumer Financial Protection Bureau would require companies like Affirm and Klarna to provide refunds for damaged or returned goods, investigate disputes, and send out monthly statements as credit card issuers do.¹³

Point of sale get crowded

Changes are also taking place at the point of sale, where pay later services have dominated.

Amazon has alternative payment partnerships with third-party apps such as Affirm, Klarna, and Zip. But it also offers flexible payments on its branded credit card, Prime Visa, and for eligible Citi credit card holders through Citi Flex Pay.¹⁴

The online retail giant also offers installment loans directly, from services such as Amazon Monthly Payments.¹⁵

Walmart has put its own stamp on pay later. In addition to offering services through Affirm, the retailer has its own lending startup, One, which provides pay-later options at many Walmart locations.¹⁶

Bank and retailers aren’t the only ones expanding. Pay later apps have become embedded into digital wallets, right alongside credit cards, for users to select when paying with their phones and other devices.

Apple Pay discontinued its own pay later service in 2023¹⁷ and has inked partnerships with Affirm and Klarna to fill the void.¹⁸ Google Pay just added pay later options from Afterpay and plans to add services from Klarna next year.¹⁹

Usage is also expanding beyond retail shopping. Affirm has started offering installment loans for elective medical procedures and veterinary services.²⁰ It also has a partnership with online travel firm Priceline,²¹ while Klarna offers installment loans to Expedia users.²²

Avoiding the holiday hangover

New Empower research reveals that money worries are taking the joy out of the holidays for many Americans. More than half of survey respondents are concerned about being able to afford gifts (59%), finding the best deals (51%), and being able to pay their bills on time (54%).

Consumer advocates are more worried about debt loads as shoppers face pay later offers from so many different channels. Some pay later products allow borrowers to pay off installment loans with a credit card, potentially trading one debt for another.

JPMorgan Chase has blocked its credit card customers from paying off installment loans from pay later services, as it generally does with other forms of debt. Other card providers are expected to follow suit, especially as they offer their own pay later products.²³

Consumer finance professionals want shoppers to be more attentive as they use pay later apps in the holiday season. Shoppers run the risk of overextending themselves if they frequently pay just the partial cost of products and services up front.²⁴

Finance professionals say consumers should especially track their pay later borrowing from multiple sources. A study by Consumer Reports found that borrowers with four or more loans were twice as likely to miss a payment, which can trigger late fees and interest payments.²⁵

Last year’s holiday season produced a hangover effect for some borrowers as multiple payments came due in January.²⁶ Consumer advocates say having a hard limit on loans and using them within a budget plan is a good way to avoid buyer’s remorse when the calendar turns 2025.²⁷