Across the country, many households are struggling to maintain even a modest financial cushion. The Bank of America Institute reports that almost one-quarter of U.S. households in 2025 were living paycheck to paycheck, with most of their income going toward basic expenses.
Meanwhile, financial literacy challenges persist. According to the FINRA Foundation’s National Financial Capability Study, only 4% of Americans can correctly answer all seven financial literacy questions in the survey. Fewer than half can answer at least four. These factors can influence how people view and handle unexpected expenses. When budgets are tight and understanding limited, even small decisions can have lasting consequences.
In these moments, consumers often turn to short-term liquidity tools. Buy now, pay later (BNPL), small-dollar deposit-based loans and overdraft protection are all commonly used during periods of financial strain, but they serve different purposes, work in very different ways and carry different risks and benefits.
Financial institutions are uniquely positioned to help consumers understand the intricacies of each option and navigate these tradeoffs when money is tight.
How BNPL Works and Why It Continues to Grow
BNPL lets users split purchases via merchant channels into smaller payments over several weeks or months. Many BNPL providers advertise no interest or no credit check, which can make these plans appealing to people who may not qualify for traditional credit or lack the cash on hand to cover the purchase upfront. In some cases, BNPL providers assess affordability and manage repayment based on visibility into a consumer’s bank account or cash-flow activity, rather than traditional credit underwriting.
The popularity of BNPL has grown quickly. A 2024 Federal Reserve report revealed that 15% of adults used BNPL in the prior 12 months, up from 10% in 2021. Juniper Research estimates that BNPL transactions will reach $687 billion by 2028, more than double 2024’s $334 billion.
The idea of paying in installments isn’t new; layaway was a common option long before the mass availability of credit cards. What makes BNPL different is the ability to receive goods immediately, combined with frictionless online checkout. As a result, BNPL is frequently used for planned or discretionary purchases—such as holiday gifts, household items or larger one-time expenses—rather than to address an immediate cash-flow gap.
The Federal Reserve found that 58% of BNPL users said it was the only way they could afford their purchase. Among users earning under $50,000, that number jumps to 72%.
The FINRA Foundation study also shows that BNPL usage is higher among certain groups, including Hispanic and Latino consumers (34%), consumers under age 34 (32%) and Black consumers (29%). It also uncovered that BNPL users are more likely than non-users to:
- Carry a credit card balance
- Engage in fee-generating credit card behaviors (i.e., paying only the minimum or exceeding their credit limit)
- Overdraw their checking account.
BNPL can make purchases more manageable in the moment, but higher use among financially stressed groups raises concerns about how easily short-term flexibility can translate into longer-term financial pressure.
Risks to Consider with BNPL
BNPL can be helpful for a planned purchase, but as a newer and less regulated product category, its risks are often less familiar to consumers and institutions alike:
- Late Payments. The Federal Reserve’s report found that nearly one-fourth of BNPL users paid late in the year prior, and late payments increased across every income group. Of those who paid late, 57% were charged an additional fee, which can make “interest-free” purchases more expensive than anticipated.
- High Interest Rates. Not all BNPL plans are interest-free. Some charge interest as high as 36%, higher than many credit card APRs. These terms may be overlooked by consumers moving quickly through online checkout.
- Repayment Complexity and Loan Stacking. The Consumer Financial Protection Bureau (CFPB) has found that more than 60% of BNPL users were “loan stacking,” or taking out overlapping BNPL loans. By spreading out multiple purchases over several weeks and payments, it’s easy to see how debt can quietly grow as consumers lose track of their purchases, account balance and payment due dates.
- Increased Spending. Research has found that BNPL use is associated with a significant increase in spending—a risky dynamic for those already facing low liquidity.
- Credit Reporting Uncertainty. Major credit bureaus have begun to include BNPL loans on credit reports, but each is taking a different approach. This inconsistency leaves consumers uncertain about whether BNPL usage or late payments will affect their credit and future borrowing costs.
- Checking Account Impacts. BNPL repayments are often automated and drawn directly from a consumer’s checking account. When balances are already strained, these withdrawals can trigger overdrafts or other account disruptions, compounding financial stress for consumers and operational challenges for financial institutions.
Understanding Overdraft Protection
Overdraft protection works differently. When a consumer spends more than the available balance in their checking account, the bank or credit union may pay the transaction anyway, temporarily bringing the account negative. Typically, a fee is charged for this service, and the balance returns to positive when the account holder deposits funds.
Overdraft protection is designed as a safety net to help make important payments, or purchases, on time; it’s not a long-term budgeting strategy. It is most often used to cover essential expenses, such as groceries, fuel, rent or utilities, when money is expected but not yet available.
Historically, concerns around overdraft programs have centered on high or unexpected fees. That’s why transparency, fairness and clear communication are critical to responsible program design. When structured thoughtfully, overdraft protection provides short-term relief that account holders can rely on, with immediate clarity about cost and resolution.
Unlike BNPL, overdraft use does not create a new loan with ongoing payments. It applies a fee to a single covered transaction. When designed responsibly, overdraft programs provide clear, opt-in access to funds with transparent terms and consideration for an account holder’s ability to repay, including how and when debit card transactions are covered.
Like any liquidity tool, overdraft protection is most effective when used occasionally; frequent usage may signal the need for additional consumer education or alternative short-term liquidity options.
With transparent design and clear communication, overdraft protection helps consumers navigate brief cash-flow gaps with confidence.
Risks to Consider with Overdraft Protection
Like any short-term liquidity tool, overdraft protection also carries risks, though these are often better understood by consumers than the relatively newer BNPL. Fees can add up quickly when overdraft is used repeatedly, particularly for smaller transactions where the cost of the fee exceeds the purchase amount. Frequent overdraft usage may also indicate ongoing cash-flow challenges that a one-time fee does not resolve, increasing the risk of compounding financial strain over time.
Small-Dollar Deposit-Based Loans: A Growing Middle Ground
In recent years, many large banks have introduced small-dollar, deposit-based loan products designed to address short-term liquidity needs while reducing reliance on overdraft fees or high-cost alternatives such as payday loans.
These products are typically offered to existing checking account customers and structured with simplicity and transparency in mind. Loan amounts are generally modest, often less than $1,000, and repayment is commonly aligned with future deposits or fixed installment schedules.
Unlike BNPL, which is often tied to discretionary purchases across multiple merchants, small-dollar deposit-based loans are generally intended to cover everyday or emergency expenses, such as rent, utilities, medical bills, vehicle repairs or other unavoidable costs. By tying eligibility and repayment to the existing account relationship, these products aim to provide access to credit while helping consumers avoid repeated overdrafts or higher-cost borrowing options.
BNPL, Deposit-Based Small-Dollar Loans and Overdraft: Different Use Cases, Different Tradeoffs
Account holders with limited liquidity often rely on short-term tools when cash flow is tight. While all three types discussed are used during periods of financial stress, they tend to serve different types of purchases and introduce different patterns of risk.
BNPL tends to shift financial impact over time, which can support planning for certain expenses but requires careful tracking of multiple obligations and payment timing. Small-dollar deposit-based loans introduce a structured repayment schedule that is often aligned to expected deposits, trading some flexibility for predictability. Overdraft protection allows for immediate purchasing power in a single moment, resolving an immediate shortfall but making repeated use more consequential when fees accumulate.
From a consumer perspective, the challenge is not choosing a universally “safer” tool, but understanding how and when each option is most appropriate, and avoiding patterns where short-term solutions create longer-term stress.
Short-term liquidity tools serve different needs, making it important for consumers to understand when and how each option is most effective.
How Financial Institutions Can Help
The smartest liquidity solution is the one that serves the account holder’s best interest. Education is the first step. Many consumers do not fully understand how BNPL, small-dollar loans or overdraft programs work, the costs associated with each or the potential long-term implications of choosing one over another.
By offering an optional overdraft program with predictable fees, as well as alternatives like small-dollar credit products, community banks and credit unions can support account holders through difficult moments. Institutions can also monitor frequent usage and intervene with timely, personalized education. Dynamic, personalized limits based on an account holder’s ability to repay can further minimize risk for the account holder. Together, these approaches help institutions protect consumers, build trust and support healthier financial outcomes—support that third-party BNPL providers are not designed to deliver. All of these actions are key to building trust and long-term loyalty as well as consumer satisfaction.
For a deeper look at how overdraft programs can be designed and managed responsibly, read our white paper on overdraft practices and consumer outcomes.
Read the white paper
Tim Barrett, ILS Product Owner, Executive DDA Strategist & Senior Data Analyst
With decades of experience in banking and technology consulting, Tim is a trusted advisor to hundreds of financial institutions of all sizes. His leadership focuses on delivering optimized account holder experiences through revenue-driving, compliance-focused software solutions. As Product Owner of the Intelligent Limit System® at CSI, he leads enhancements to the Consumer Liquidity Engine™, integrating advanced data analytics with regulatory expertise. Tim began his consulting career at Sheshunoff Consulting, where he led teams specializing in software-based liquidity strategies and risk management. A proud member of Texas A&M’s Class of ’95, he lives in College Station, Texas with his wife of over 30 years and their growing family.