Buy something now, pay later: It's changing how we shop. People are paying for laptops, coats and even groceries in installments. In a year marked by historic inflation, this is the holiday season's biggest trend.

"If a retailer doesn't offer that option, I don't shop with them," says Elmy Escalante, 50, from California, who has used financial companies Afterpay and Klarna to buy a computer, a vacuum cleaner and winter clothes.

Escalante's sentiment is spreading fast. The number of "buy now, pay later" loans grew more than tenfold during the pandemic, a U.S. government study shows, from almost 17 million in 2019 to 180 million in 2021. This month, an Ally Bank survey found twice as many people using "buy now, pay later" than they did just in August.

The appeal is obvious. At online checkout, most BNPL companies typically let you pay a quarter of the bill (or less), as long as you set auto payments for the rest — no interest, no credit history required. And so, for example, Escalante can buy $140 lounge pants in four installments of $35, over six weeks. Or Peloton can sell $1,530 bikes for 12 monthly payments of only $127.50.

One common problem is bank overdraft fees, when some shoppers lose track of future auto payments and don't have enough in their account when the debt gets deducted. New research is tackling the central concern about "buy now, pay later": Does it encourage people to overspend?

People use it as an alternative to credit cards

"Buy now, pay later" has largely grown by offering a new way of stretching out big payments for people with no credit history, bad credit or a desire to avoid credit card debt. A short BNPL loan usually doesn't ping your credit score, as long as you pay on time. (Federal research estimates about 12% of "buy now, pay later" borrowers faced late-payment fees in 2021, and almost half were waived.)

"With 'buy now, pay later,' I feel more — I don't know if responsible — but I feel more on top of it," says Maria Dahn, 35, from Overland Park, Kan. She used to shop with credit cards, make minimum monthly payments, roll over a balance and face escalating interest charges.

Now, she's closed her credit cards. This year, Dahn bought a $550 Doona stroller for her newborn in installments of $94.36, a six-month plan that did incur $16 in interest (for taking longer to complete payments than the typical six weeks). But it still cost her less than if she had used an average credit card.

"It doesn't snowball. ... It's not like I keep adding to it like with a credit card," Dahn says, and quickly clarifies: She could, in theory, run up a bunch of "buy now, pay later" loans, but she makes she's sure she "not tripling or quadrupling" her BNPL debt.

Stores pay high fees to offer 'buy-now-pay-later'

The way BNPL providers make money is by charging retailers. In fact, stores might pay 2% fees for credit-card companies to process transactions, but they pay up to 8% fees to buy-now-pay-later providers.

Financially, that would only make sense if "buy now, pay later" encourages people to buy more than they would otherwise, says Marco Di Maggio, one of the authors of new research from Harvard Business School.

Indeed, Di Maggio and team found that people who use "buy now, pay later" not only spend more on average, they also universally shift more of their budgets to retail. In other words, they shop more.

Retailers have also said that "buy now, pay later" encourages more people to actually complete their purchases rather than abandoning their online carts. And recently, BNPL companies have expanded marketing on their own apps, pushing out notifications of sales to shoppers who'd used their loans in the past.

"They do make it incredibly easy and tempting to make purchases," says Andy Arias, 43, from Los Angeles. "And if gone unchecked, it can be a little bit addicting, you know?"

It's an easy mind trick: you get, say, an $80 sweater today, but $60 of that is a future-you problem. In reality, you're likely to add more things to your basket as you check out, so you might still spend that full $80 today, with another $60 still due later.

'Buy now, pay later' loans not reported to credit bureaus

A growing number of brands have started to offer "buy now, pay later," including Instacart for food delivery, some gas stations for fuel and airlines for tickets. Last spring, Arias paid 12 installments of $126 for a last-minute flight to London for a wedding, feeling "a little weird" in a plane seat he hadn't technically paid for yet.

Because Klarna, Afterpay and their rivals aren't technically lenders, they don't have to report to credit bureaus. So we don't know, for instance, how many shoppers owe multiple "buy now, pay later" loans, potentially hurting their ability to pay utilities and other bills.

Harvard research estimated that as of last year, 15% of the U.S. population had tried BNPL at least once — a number that has certainly grown since then. Some surveys of shoppers put the number much higher, topping 50% or 60%.

So far, delinquencies on "buy now, pay later" loans seem to be in line or below credit cards, according to the Consumer Financial Protection Bureau. Both are rising.