2025 BNPL Trends: How Rising Interest Rates Affect Users and Market Growth

Leading BNPL providers maintain stringent lending criteria and loss prevention strategies to safeguard their operations.

Key Insights

• Rising interest rates pose challenges to the expanding BNPL market, especially for long-term loans that accrue interest.
• Major BNPL firms have sustained low default rates, typically around 1% or less, aligning with historical averages.
• Top companies like Klarna and Afterpay implement rigorous credit checks and protective measures to minimize defaults.
• Contrary to common belief, BNPL users often have bank accounts but may exhibit greater financial vulnerability.
• The BNPL sector surged during the pandemic and is projected to reach 900 million global users by 2027.

If you are among the approximately 360 million global users of BNPL platforms such as Afterpay, Klarna, or Sezzle, you might wonder how rising interest rates could influence your repayment plans.

Most BNPL plans, including popular "pay in four" installments with no interest, remain unaffected by interest rate hikes, offering consumers cost-effective payment options.

However, BNPL providers have introduced longer-term loans with interest rates that can surpass credit card rates and may increase further with market trends. For instance, Block Inc.'s Afterpay offers loans up to $25,000 with interest rates reaching 36%, accompanied by potential late fees exceeding $30.

Higher interest rates could test BNPL companies as increased borrowing costs might lead to more payment delinquencies and defaults among financially stretched customers. Additionally, financing these loans could become more expensive for providers, according to Fitch Ratings.

Performance of Leading BNPL Providers Amid Rising Rates

Despite concerns, major BNPL companies like Afterpay and Klarna have maintained stable default rates around 1%, consistent with long-term performance.

Klarna reports a decline in delinquency rates in 2024, attributing success to robust underwriting processes and responsible consumer behavior.

Protective measures include transparent repayment plans, stringent creditworthiness assessments, spending limits, and service restrictions for habitual late payers.

Klarna emphasizes that with soaring bank and credit card interest rates, BNPL offers a fairer, more affordable alternative, saving consumers both time and money.

Afterpay confirms that 98% of payments in Q1 2024 were on time, with consumer receivable losses remaining below 1%.

Competitive Landscape and Regulatory Environment

BNPL faces competition from established players like Apple and American Express, which have launched their own interest-free installment services, such as Apple Pay Later and AmEx's Plan It.

Regulators are increasing oversight, with the FTC urging BNPL providers to adhere to consumer protection laws and agencies like the CFPB highlighting risks including insufficient disclosures and data privacy concerns.

Understanding BNPL and Its Mechanics

Buy Now, Pay Later enables consumers to split purchases into manageable installments, often interest-free, making it an attractive alternative to traditional credit.

Typical BNPL transactions involve an initial down payment (e.g., 25%) followed by several interest-free payments over weeks. Popular purchase amounts range between $101 and $250, especially among Gen Z and Millennials, who frequently buy furniture, electronics, and apparel.

Demographics of BNPL Users

BNPL users are generally younger and more financially vulnerable but tend to have bank accounts, dispelling myths that BNPL primarily serves the underbanked.

A CFPB survey shows 95% of BNPL users have credit histories, compared to 86% of non-users, with higher usage among women, minorities, and lower-income consumers.

BNPL Market Growth Outlook

The pandemic accelerated BNPL adoption, growing the market from $2 billion in 2019 to $24.2 billion by 2021, a remarkable 1,000% increase.

Juniper Research forecasts BNPL users worldwide to reach 900 million by 2027, driven by economic uncertainty and demand for affordable payment alternatives.

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