Buy now, pay later (BNPL) spending is expected to surge to record levels this holiday season, according to a new forecast. And with so many young "buy now, pay later" shoppers already in debt from the short-term financing tool, what risks does it pose to their budgets in the coming months?

BNPL is expected to generate $17 billion in online holiday spending this year, up $2.5 billion, or nearly 17%, from last year, according to Adobe Analytics’ examination of commerce transactions online. One in five Americans plan to use BNPL to purchase gifts during the holidays, according to Adobe, which surveyed more than 1,000 U.S. consumers. BNPL spending should hit $9.3 billion in November, making it the largest month on record, with Cyber Monday as the largest record day at $782 million.

Even as its popularity soars, there are warning signs it’s financially unhealthy for the many Gen Z and millennials (typically around 40 years and younger) who tend to use the short-term financing, which allows shoppers to buy items and pay for them over time in several equal installments.

"Users could be on the precipice of financial hardship from debt overload,” said Jaime Toplin, a financial services analyst at business intelligence company Morning Consult. 

Why is buy now, pay later so popular? 

Offered mostly by fintechs, BNPL allows customers to pay back their purchases without interest and with the first payment usually made at checkout. The most common "buy now, pay later" plan is four equal payments, which should allow you to pay off your debt in six weeks. It's been a lifeline for some people as student loan repayments return and inflation causes savings to shrink.

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"BNPL provides consumers with flexible payment options so they can manage spending," said Vivek Pandya, lead analyst at Adobe Digital Insights. That "can be a big help for price conscious consumers, especially when purchasing higher cost item."

It's also relatively easy for shoppers to get approved for "buy now, pay later" and it isn’t reported to credit bureaus.   

What is bad about buy now, pay later?

“BNPL may attract consumers who already have financial difficulties and are struggling to pay their existing bills and debt payments,” New York Federal Reserve economists said in September. It may also encourage “excessive debt accumulation over time, affecting a consumer’s ability to meet non-BNPL obligations” or users to overextend themselves, they said. 

Since "buy now, pay later" isn’t reported to credit bureaus, it’s easy for people to take out loans from different lenders simultaneously or continue to spend and accumulate more debt.   

Users should also note that even though interest is not charged on the loan, they'll be hit with late fees for missed payments, which can add up quickly, warns the Consumer Financial Protection Bureau. 

You may also forfeit consumer protections you would normally get if you used a credit card if the product is defective, is a scam, or needs to be returned. 

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Who are buy now, pay later users?

BNPL users tend to be young (millennials and Gen Z) and wealthy (in households earning more than $50,000 annually) but also debt laden and hungry for even more credit, according to a Morning Consult poll of 2,223 U.S. adults between Aug. 31 and Sept. 3.  

On average, BNPL users’ credit scores were 50 points lower than non-users, Philadelphia Federal Reserve research showed.   

However, with millions of Americans feeling pinched ahead of the holidays, a broader swath of people may be considering BNPL.

"This season is all about strategic spending, and shoppers are using BNPL to help them budget," according to a survey of 1,500 U.S. shoppers and 265 U.S. Square sellers that was conducted by payments firm Square and its buy now, pay later provider Afterpay.

With more than three-quarters of shoppers saying inflation has made it difficult to save, about 21% of consumers said they’d consider using BNPL to stretch their holiday shopping budget, the report said. By age group, millennials (35%) are the most willing, it said. 

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.