Chapter 1: The Rise of New Credit Products

The emergence of innovative credit solutions poses a significant risk for consumers, potentially leading them into deeper financial trouble. This trend highlights a concerning aspect of our economic landscape.

Last fall, while driving through southern Arkansas, I noticed a sharp pain in one of my upper molars. The last thing I needed was a dental crisis while relocating across the country. Once I settled into my new place, I promptly scheduled a dental appointment. Unfortunately, the dentist confirmed my suspicions: my tooth was broken and not salvageable, leading to its extraction a month later.

Given my self-employed status and the delays caused by COVID-19, I was overdue for a dental checkup. After everything was settled, I faced a bill of $4,000 for dental work. While my insurance covered part of the expenses, a substantial amount remained for me to pay out of pocket. My dentist offered a solution: I could finance the remaining balance to make the payments more manageable. To preserve my cash reserves for dental work, I chose to finance my latest treatment — a crown — over six months.

I assumed my dentist provided an in-house payment plan, but instead, I was introduced to Affirm.

Affirm is among a growing number of buy-now-pay-later (BNPL) platforms that have emerged recently. Previously, I wrote about my experience with Afterpay, another BNPL service, which allowed me to purchase a bed without incurring interest. My payments were automatically deducted from my bank account every two weeks until settled, and I faced fees only for insufficient funds.

However, I soon learned that Affirm operates differently. While it divides purchases into smaller payments, it also charges interest. I was unaware that my dental debt would accrue interest — and the amount — until after I completed the transaction. In the end, financing my crown through Affirm turned out to be pricier than using a conventional credit card.

This article will explore how these new financing methods are transforming the concept of debt. An increasing number of consumers are using lending products for essential expenses like groceries and, in my case, dental care. This trend indicates that many individuals are not financially irresponsible but simply lack the funds to cover their basic needs. It reveals significant structural issues within our economy that suggest it may not be as robust as we believe, particularly for everyday consumers.

More consumers are resorting to borrowing to manage living expenses, with interest rates exceeding 30%, making such debt increasingly untenable. BNPL apps serve as a hybrid of small installment loans and credit cards, providing consumers with immediate cash for purchases while offering repayment in smaller, more digestible amounts.

These platforms can be appealing for those who need immediate funds but cannot wait for their next paycheck. They represent a relatively less exploitative alternative to payday loans.

While these services may appear to be a viable substitute for credit cards, alarming patterns emerge in their usage. Many price-conscious consumers, particularly from Gen Z, are turning to apps like Klarna and Afterpay for grocery purchases. Moreover, Affirm's acceptance at Walmart suggests that financially strained individuals are relying on such services to meet basic needs.

To better understand these apps, I tried Afterpay for the first time in 2023. I appreciated the ability to spread out payments without incurring debt. Assuming all BNPL platforms operated similarly, I opted to use Affirm for my dental procedure a year later.

Before my appointment, I set up an Affirm account, unsure of its workings. I completed the process at the dentist's office, where the administrator guided me through the setup. It wasn't until I returned home that I fully grasped what I had signed up for. Upon checking my email, I was shocked to discover that I had agreed to a repayment plan with a staggering 32.64% APR.

This situation raises several concerns. BNPL platforms are marketed as credit card alternatives, targeting individuals with poor credit or young consumers without established credit histories. This makes their high-interest rates particularly problematic. With APRs reaching 30%, these apps can rapidly lead consumers into debt.

Additionally, BNPL services lack regulation, are not reported to credit bureaus, and do not offer the standard consumer protections associated with other lending products. Unlike credit cards, which disclose terms before purchases, BNPL apps can allow consumers to spend thousands at high interest rates without their knowledge.

This environment makes it easy for consumers to fall into debt without realizing the magnitude of their obligations. It exploits financial illiteracy, as many individuals struggle to comprehend compound interest. Moreover, linking these apps to external payment sources can create a situation where consumers find themselves perpetually borrowing, further entrenching their financial struggles.

The increasing prevalence of new credit products to help consumers manage essential expenses signals a deeper issue: a lack of cash flow in the economy. Despite a significant increase in the money supply in recent years, the benefits have not reached the average consumer.

Beyond the exploitation of consumers, BNPL apps expose another troubling reality: inadequate money circulation to meet consumer needs. Financing purchases typically stems from a lack of available cash. While some consumers use credit for rewards, many others do so out of necessity.

According to Bankrate, 56% of Americans lack $1,000 in savings for emergencies, indicating that most would have to rely on credit cards or BNPL services to cover unexpected expenses.

There's a prevailing notion that Americans are poor at managing money, supposedly lacking the discipline to save. While this may hold some truth, it does not fully account for the struggles many face. Wages have stagnated while costs have soared, leaving most Americans with little room to save, even with the best intentions.

This is particularly perplexing given the significant increase in the money supply since 2020. With so much money in circulation, the question arises: where has it all gone?

The answer lies with corporations. They are not only capitalizing on inflation for higher profits but are also hoarding cash. As noted by the Harvard Business Review, non-banking U.S. firms have amassed cash reserves totaling $6.9 trillion, surpassing the GDP of all but two countries. Even amid rising interest rates, cash constitutes one-fifth of total assets held by these firms.

This financial landscape explains the popularity of BNPL apps. Cash transactions are not a feasible option for most consumers, as the necessary funds are concentrated at the top. While some money may trickle down, it is insufficient. Consumers are competing for the limited cash available, resorting to credit for the remainder.