Buy now, pay later (BNPL) loan options have grown in popularity, especially among younger consumers. With BNPL, a person can purchase something with little or no initial payment and pay off the balance over a small number of payments. According to a report coauthored by the Urban Institute and the JPMorganChase Institute, the data show that between 2019 and 2023, the amount of BNPL spending increased 37-fold, from $2 billion to $75 billion.

But even as use of this consumer product grows, it is unclear how it might affect borrowers’ credit. Unlike credit cards, most BNPL loans do not require a hard credit inquiry and often aren’t reported to major credit bureaus, so their use may not uniformly affect credit characteristics like a credit score or debt-to-income ratio. In particular, this lack of visibility could complicate a borrower’s ability to qualify for or repay a mortgage.

Last summer, the US Department of Housing and Urban Development issued a request for information about how BNPL lending affects housing stability. The report from the Urban Institute and JPMorganChase Institute researchers highlights how BNPL may affect outcomes across the homeownership journey.

How are prospective homebuyers using BNPL loans?

Homeownership is a key source of wealth and financial stability for most households, with successful homeownership reflecting an ability to buy a home and sustain ownership. Typically, mortgage underwriters measure a prospective buyer’s likelihood of sustaining homeownership by using traditional tradelines, such as auto loans and credit cards. But the growth of BNPL options has added a new wrinkle.

In our research with JPMorganChase Institute researchers, we used an analytical panel that links anonymized bank accounts with individual credit bureau records from 2019 to 2023, providing a detailed view of cash inflows, spending, and debts reported to the credit bureau alongside BNPL payments that are otherwise invisible in credit reports. The data include a longitudinal sample of homeowners with active first-lien mortgages and first-time buyers. The analysis was limited to BNPL users who had used at least one Pay-in-4 plan, a BNPL service that allows consumers to split a purchase into four equal installments.

We find that BNPL is an important form of short-term credit access leading up to a mortgaged home purchase, particularly for frequent BNPL users who average two or more Pay-in-4 series per year after their first use of BNPL. Among frequent users, BNPL spending, as a share of total outflows, rose steadily in the year before a home purchase, peaking about four months before purchase. At the same time, revolving credit spending shares like credit cards fell.

In other words, frequent users who are about to purchase homes trim revolving balances while relying more on BNPL. Although this analysis doesn’t confirm that homebuyers are consciously substituting revolving credit for BNPL, the trends do show that a mortgage applicant’s credit use may not accurately measure their ability to repay the prospective mortgage loan in the months leading up to a home purchase.

BNPL can also play a key role in mortgage performance after the home purchase. Among mortgaged homeowners, BNPL use is higher among consumers with maxed-out credit cards and tight budgets, while those with larger savings buffers use BNPL less. First-time homebuyers who use BNPL frequently are 8 percent more likely to miss a mortgage payment within a year of home purchase. In the event of a job loss, which is a key determinant of mortgage delinquency, BNPL use can exceed 20 percent of spending for low-income homeowners with a Federal Housing Administration mortgage.

Housing policymakers will need to consider how to balance BNPL’s benefits and challenges

Credit scoring agencies are already working to incorporate BNPL into their models, which will help bring greater transparency and trust to the mortgage finance system. At the same time, public policy must recognize that BNPL use comes with trade-offs.

Our analysis shows that BNPL expands financial access to short-term credit at critical junctures of a consumer’s financial life. If BNPL users repay their loans, a lack of credit reporting could worsen their ability to access mortgage credit or afford homeownership. But BNPL use by more vulnerable communities could also damage the health of their balance sheets if it causes these consumers to overspend. We know that BNPL use is higher among homeowners with maxed-out credit cards and tight budgets. If these vulnerabilities are not reported, a homeowner’s perceived ability to repay their mortgage may be overstated.

As BNPL volume grows, new data sources are needed to shed light on BNPL’s consequences for mortgage finance. These data will also ensure that evidence informs policymaking. Additionally, policymakers and researchers should continue to gather information while improving transparency and strengthening consumer financial education. These steps can help policymakers balance the opportunity for financial innovation with the need for clear consumer guardrails.