“Buy now, pay later” plans — which allow consumers to split purchases into a handful of interest-free installments — have become a common way for Americans to pay for everything from furniture to groceries. New research from Olin Business School at Washington University in St. Louis suggests the increasingly popular payment option can have consequences beyond the checkout screen — influencing retail prices, inventory decisions and the financial burden on consumers.
The study, “Buy Now, Pay Later: The Hidden Effects of Consumer Liquidity on Retail Prices and Inventories,” forthcoming in Management Science, by Naveed Chehrazi, Panos Kouvelis and Wenhui Zhao, examines how pay-later financing changes the behavior of both consumers and retailers.
The central insight is straightforward: what consumers are willing to pay is not necessarily the same as what they can afford to pay at a particular moment.
“The ‘buy now, pay later’ button does not target how much you are willing to pay for an item. It targets what you are able to pay right now,” said Kouvelis, the Emerson Distinguished Professor of Supply Chain, Operations, and Technology and director of The Boeing Center for Supply Chain Innovation.
In 2025, an estimated 91.5 million Americans used a pay-later plan, according to data from LendingTree. The Federal Reserve Bank of Richmond estimated that pay later purchases totaled about $70 billion that year — roughly 1% of U.S. credit-card spending.
How ‘pay later’ lowers profits while raising prices
Offering installment payments comes with a cost for retailers, the researchers warn.
Pay-later companies such as Klarna, Affirm and Afterpay pay retailers upfront and then collect installment payments from consumers. In exchange, the financing company takes a portion of the transaction. Retailers accept that cost because offering installment payments can attract customers who otherwise might abandon their purchases and can increase the size of their shopping baskets. However, that means some retailers raise their sticker prices to compensate for the financing cost.
As a result, the store effectively serves two groups of customers from the same inventory: consumers who pay the full price and those who finance their purchases. To offset the financing company’s fee, the retailer may raise its sticker price, meaning cash-paying customers can end up subsidizing customers who use pay-later.
The researchers identified another, more counterintuitive effect. Even as pay-later increases the number of products sold, a retailer’s effective price — what it actually keeps from each sale after financing costs — can decline.
“More sales is not the same as more profit,” said WashU’s Chehrazi, an assistant professor of supply chain, operations and technology.
The effects can extend to inventory decisions, too. Across millions of simulated scenarios, the researchers found that accepting pay-later could lead retailers to stock less inventory because a lost sale becomes less costly to bear. They found no scenario in which the payment option turned an unprofitable product into a profitable one.
Consumers saddled with ‘phantom debt’
The implications for consumers are similarly complex.
Pay-later initially was associated largely with discretionary purchases, but consumers increasingly are using installment plans for necessities. Today, roughly one-third of pay-later users reported using the service to purchase groceries, while a growing share reported using it for rent and bills.
That shift is significant because the same tool that helps consumers overcome a temporary cash-flow problem also can allow them to take on obligations they may struggle to manage. About 41% of users missed at least one payment in the previous year, according to data cited in the report.
Historically, pay-later loans also have been largely invisible to traditional credit reporting, allowing consumers to accumulate multiple loans from different providers without any single lender seeing their full borrowing picture — a phenomenon the researchers describe as “phantom debt.” FICO, a leading credit scoring company, began incorporating pay-later payment history into the credit scores used by lenders in 2025, meaning missed installments now may carry consequences beyond late fees.
Still, the researchers caution against viewing pay-later as either a financial miracle or an impending crisis.
The Federal Reserve Bank of Richmond estimated that pay-later spending grew by roughly 20% annually in 2025, but remained a small share of overall consumer credit. As of early 2026, the Federal Reserve of Richmond found no clear evidence that pay-later was contributing to broader financial stress.
The research instead points to a more nuanced conclusion: Pay-later can solve a genuine problem for consumers who value a product but temporarily lack enough cash to pay for it upfront. The option to pay later can benefit both retailers and consumers — especially for larger, discretionary purchases.
However, the risks become more pronounced as pay-later moves from discretionary purchases to necessities — potentially changing not only how consumers pay, but also the prices they face and the way retailers manage their businesses, the researchers found.
