Cash-Strapped Shoppers Are Relying More on Expensive Credit for Everyday Essentials

Financially stretched consumers are increasingly using buy now, pay later plans and other forms of borrowing to cope with inflation and rising prices.

Inflation, including higher gas prices driven in part by ongoing geopolitical conflict, continues to squeeze household budgets. For people already struggling to get by, higher costs can force them to borrow just to cover basic needs, creating yet another financial burden.

New findings from the Kansas City Federal Reserve and Pew Research indicate that consumers under financial pressure are far more likely to take on debt than people who are not struggling.

“Fifty percent of those who had trouble affording a basic necessity said that they borrowed money from friends and family,” said Juliana Horowitz, senior associate director at Pew Research Center. “About 30% of them said they took out a payday loan, compared to 4% of those who didn't have those challenges.”

Lisa Berdie, director of research at the Financial Health Network, said families are leaning on borrowing while inflation stays high.

“When we talk about rising gas prices, or when we talk about rising prices at the grocery, this is really hitting financially vulnerable households, and they are trying to come up with the tools that they need to be able to cover those expenses.”

But borrowing carries its own price. Berdie said financially vulnerable households spend 17% of their income on interest and fees.

One increasingly common option is buy now, pay later.

“We found that 29% of buy now, pay later users used the loans for groceries, and that is double the percentage from just a couple of years ago,” said Matt Schulz, chief consumer finance analyst at LendingTree.

Although BNPL services often begin as interest-free, many borrowers end up paying late and racking up fees.

“All of a sudden that interest-free loan isn't free anymore, and you end up finding yourself stuck,” Schulz said.

Kayla Bruun of Morning Consult said she will be watching that trend closely this holiday season.

“The concern I think each year and I'm extra concerned for it this year, is if low-income adults have this available, they spend that, and then come January are there still going to be financial strains?” she said. It could make it harder for households to pay off holiday debt.