Budgeting

The Buy Now Pay Later Bubble Is Bursting

Published on May 1, 2026

Written by Sarah Rochford
Updated May 1, 2026

Buy now, pay later sounds like a perfect system until you realize the companies behind it are crumbling. And the reason why tells us a lot about the truth of what’s happening in America and how it impacts users and everyday Americans.

The Problem With Buy Now Pay Later

The pitch for buy now pay later is simple. When you make a purchase, instead of paying the full price upfront, you can split that payment into installments instead. The pitch worked because right now an estimated 91 million Americans are using BNPL.¹

Compared to credit cards, BNPL feels safer for many. I mean, would you rather apply for a credit card, deal with a credit check, card limits, and be at the risk of crazy high interests, or would you rather click a button at checkout for 0% interest? On fashion sites, at grocery store checkouts, travel sites, even at Verizon, basically everywhere.

Even Cash App had a massive marketing campaign where they said small payments are cuter. …Yeah, I don’t know about that. These are all just tricks to get you to spend more. Because of this, the global BNPL market is expected to hit $560 billion soon.² This is no longer a niche product. But here’s where it gets uncomfortable.

Business Models of BNPL Programs

There are really two different versions of the business model, and they make money in very different ways. The first is what Klarna built its name on. You buy something, the store pays Klarna a small cut of the sale, you pay back in four installments, and as long as you’re on time, no fees, no interest, nothing extra. Clean, simple. The merchant pays, you don’t.

But the second model used by companies like a firm is interest based and similar to what you’d see from a typical loan provider. They just don’t market it that way. They offer longer payment windows, sometimes months or even years. And if you don’t pay it off fast, the interest piles on. And this matters because the model really determines how stable the business is.

And right now that first model with no interest fees and easy payment options is under serious pressure.

Klarna’s Rise and Collapse

So let’s talk about Klarna specifically because they’re the biggest name in this space and their story is wild. Klarna was founded in Sweden in 2005 and for a long time it was the cool alternative to credit cards.³ The company that was going to fix finance for people who’d been burned by banks and investors believed it.

In 2021, Klarna was valued at nearly $45 billion.⁴ That’s not a fintech startup. That’s one of the most valuable private companies in the world. But by the time Klarna went public in September 2025, the company was valued at 20 billion. On opening day, shares opened around $52. But fast forward to today and it’s around $12.⁵ That’s a collapse of more than 75% from its peak. And yes, a lot of the market has been down as of late. But Klarna’s stock has fallen faster than usual. On one single day in February, after their earnings dropped, the stock fell 26% in a matter of hours.⁹ Trading volume hit more than 10 times its daily average. That is not a correction. That is panic.

On the surface, the company looks decent. Users are growing, transaction volume is up, and revenue hit an all-time high with over $1 billion pouring in in Q4.⁶ But somehow, Klarna still lost over 200 million. And there’s more. The company has seen some executive departures and even had some lawsuits thrown their way.⁷

So, here we have a company with growing users and a falling stock price. And that combination is a signal we should pay attention to. But here’s the detail that we can’t get past. The part that tells you everything you need to know about how we got here. Klarna’s CEO, Sebastian Simmentski, built this entire company on a very specific premise. He didn’t just say BNPL was better than credit cards. He said banks were predators. He publicly mocked traditional lenders for what he literally called monetizing “misery through revolving debt”.⁸ That was the pitch. That was why you were supposed to trust Klarna over everyone else. And then quietly, while the IPO hype was still in the air, Klarna started aggressively expanding into longerterm interestbearing loans. products that span 6 months, 12 months, 24 months with interest rates that can run up to nearly 34% APR. Their loan loss provisions in Q4 alone rose 59% year-over-year. The CEO who told you banks were evil built a bank and now investors are paying for it. That’s not a stumble, that’s a bait and switch.

What’s Actually Causing BNPL To Break?

So, what’s actually causing BNPL to break? We’re going to walk you through four scenarios. And the real answer isn’t just one of them, it’s all of them at the same time.

Scenario One: People Can’t Pay Their Bills.

The Federal Reserve reported that in 2024, nearly 1 in four BNPL users made a late payment.¹⁰ A Lending Tree survey puts that number even higher, saying that 41% of BNPL users missed at least one payment in the last year.¹¹ And if default rates are rising, that’s a pretty serious pickle for Klarna because they’re not earning interest on successful repayments. They earn fees. For example, let’s say you buy a $100 item via Klarna at checkout. Klarna sends something like $96 to the store, let’s say Target. That $4 is a fee that gets paid to Klarna. Then the customer pays $25 over a period of time until Klarna recoups that $100. In a perfect world for Klarna, they get paid back in full and pocket that merchant fee millions of times. The problem is that if a customer makes only one or two payments, Klarna is on the hook for the rest. And Klarna’s credit losses rose 17% year-over-year in Q1 2025 alone, totaling 136 million in a single quarter.¹² By Q4, loan loss provisions were up 59% compared to the same period the year before. And on a whole other note, rising defaults are a recession indicator. So when people start missing BNPL payments on everyday purchases, that’s a real sign that consumers are under serious financial stress.

Scenario Two: Users Are Being Too Responsible

Sounds ridiculous, right? But here’s the thing. If everyone pays back exactly on time, Klarna only earns the merchant fee. No late fees, no interest. This can make it very hard to grow profits. The business is designed to only really do well if there’s a mixture of on-time payers and people who miss payments and pay late fees. And that’s a pretty crazy thing to even say out loud about a financial product.

Scenario Three: Buy Now Pay Later Usage Could Be Declining

People might be choosing to pay upfront or maybe they’re cutting down on spending. Either of those options would point to consumers embracing healthier financial habits.

Scenario Four: Klarna Might Be Losing To Competitors

Klarna might be simply losing to its competitors, Affirm, Afterpay, and Apple Pay Later. The space is honestly pretty crowded. So, this is very possible. But here’s the thing. All four of those scenarios could actually be happening at once. And because the success of the model is so heavily dependent on everything going right all at the same time, Klarna is struggling.

What This Means For You

So, what does this say about consumers like me and you? At the end of the day, people aren’t abandoning it, which means that the demand is real. And this means people genuinely enjoy flexibility and they’re also trying to avoid credit cards. But there’s a risk that doesn’t get brought up enough. BNPL creates what’s known as fragmented debt. You might have a plan with Klarna for a jacket, one with Afterpay for shoes, and one with a firm for a laptop. And none of these show up on your credit report in most cases. So you feel fine. But in reality, you’re carrying several financial obligations that no one is really tracking or talking about. And having several tabs open in bill stacking can lead to a trap you don’t even fully expect at all because the structure of these make them nearly invisible unless you track them. Because in 2025, FICO announced new scoring models, FICO score BNPL, that now incorporate BNPL activity into your credit score for the first time.¹³ That means that missing one of these payments could very well show up on your credit score.

So what should you do? Well, just that track them. If you make the choice to use BNPL, then treat it like real debt. Write it down. Add it up. Make sure you know what you owe when you owe it.

If you have autodraft, make sure you have enough in the bank on the draft date. And be honest with yourself as well. Are you using BMPL because it’s a helpful cash flow management tool or because you really can’t afford what you’re buying? Yes, it matters. And only you know the answer.

What Does Klarna’ Collapse Tell Us?

So, what does Klarna’s collapse really tell us? Consumers want financial flexibility desperately. They want to feel financially secure in what feels like the most uncertain of times, and they’re willing to use whatever tool will give this to them, even if that tool has cracks in the foundation, even if they know barely anything about it, which leads to incredible demand.

But the model itself might just be broken. A business model that makes money from merchant fees and late fees, that depends on massive growth to stay profitable, and that doesn’t even build in protection for the users.

Stock falling is just a sign that investors are starting to see the cracks that consumers should see as well.

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