As consumers prepare for their holiday shopping this year, some may turn to “buy now, pay later” loans to fund gift purchases, especially younger and lower-income consumers. Those who may not have access to traditional credit.
But financial experts are warning buyers to be aware of the financial risks hidden from these popular loans. If you’ve shopped online for clothes or furniture, shoes or concert tickets, you’ve likely seen an option at checkout to split the price into smaller installments over time. Companies love it. After payment, affirm, Clarify And PayPal All offer the service, with Apple due to enter the market later this year.
But as economic instability increases, so does crime. A report from September Continued The Consumer Financial Protection Bureau’s (CFPB) exposes the risks to consumers involved in buy-now, pay-later (BNPL) plans, a market that is largely unregulated and dominated by other forms of credit. Many of the protections provided are lacking.
Risk of overspending
“Buy now, the biggest risk of paying later over the holidays is overspending,” NerdWallet personal loan expert Annie Millerbrand said in an email. “A recent study by NerdWallet found that customers who used BNPL in the past year did so an average of six times.”
Experts said that BNPL’s multiple debts could be difficult to maintain. Millerbrand recommends using the BNPL for a gift or at a retailer, and then paying off that loan before taking out another.
And buyers who use BNPL loans typically spend 10% to 40% more when paying with these loans than with a credit card, According to According to a new study by Harvard Business School researchers. Because loans break purchases into smaller installments, it can entice shoppers to purchase big-ticket items.
What you should know about BNPL plans before agreeing to them.
How to buy now, pay later?
Branded as “interest-free loans,” buy-now, pay-later services require you to download an app, link a bank account or debit or credit card, and pay in weekly or monthly installments. Sign up is required. Some companies, such as Klarna and Afterpay, perform soft credit checks before approving borrowers, which are not reported to credit bureaus. Most are approved within minutes. Scheduled payments are then automatically deducted from your account or charged to your card.
Services usually don’t charge you more than what you’ve paid upfront, meaning there’s technically no interest, as long as you pay on time.
But if you pay late, you may be subject to a flat fee or a fee calculated as a percentage of the total you owe. These can run as much as $34 plus interest. If you miss multiple payments, you may be barred from using the service in the future, and the offense can hurt your credit score.
Are my purchases safe?
In the US, buy-now, pay-later services are not currently covered by the Truth in Lending Act, which regulates credit cards and other types of loans (that are paid back in more than four installments).
This means you may find it more difficult to resolve disputes with merchants, return items, or get your money back in cases of fraud. Companies can offer reservations, but they don’t have to.
Lauren Saunders, associate director of the National Consumer Law Center, advises borrowers to avoid linking a credit card to a purchase now, paying for apps later whenever possible. If you do, you lose the protections you get from using a credit card while opening yourself up to the card company’s interest.
“Use the credit card directly and get those protections,” he said. “Otherwise, it’s the worst of both worlds.”
What are the other risks?
Because there is no centralized reporting of buy-now, pay-later purchases, these loans will not necessarily show up on your credit profile with the major credit rating agencies.
This means more companies can let you buy more items, even if you can’t afford them, because lenders don’t know how much debt you’ve established with other companies.
Payments you make on time are not reported to credit rating agencies, but missed payments are.
“Buy now, pay later usually won’t help you build credit, but it can hurt it,” Saunders said.
Elise Hicks, a consumer policy adviser for Americans for Financial Reform, a progressive nonprofit, said people probably won’t seriously consider whether they can still afford street payments.
“Because of inflation, people might think, ‘I have to get what I need and pay for it later in these installments,'” he said. “But will you still be able to afford the things you’re affording six months from now?”
Why Retailers Offer BNPL Loans?
Retailers accept backend fees for buying now, paying for services later as products increase in cart size. When buyers are given the option to pay for purchases in installments, they are more likely to buy more goods at once.
When Apple recently announced that it would be creating its own Buy Now, Pay Later service, 23-year-old Josiah Herndon joked on Twitter, “I pay for 6 carts with Apple, Clarina, Afterpay, PayPal. Can’t afford it. 4, pay for the purchase in 4, and confirm.”
Herndon, who works in insurance in Indianapolis, said she started using the services because it was taking so long to get approved for a credit card, as her age means her credit is poor. There is no history. He has since used them to pay for high-end clothes, shoes and other luxury goods. Herndon said he arranges payment schedules with his paycheck so he doesn’t miss installments, calling the option “very convenient.”
Who buy now, use, pay later?
If you have the ability to make all payments on time, a buy-now, pay-later loan is a relatively healthy, interest-free form of consumer credit.
“If (loans) work as promised, and if people can avoid late fees and not have trouble managing their finances, they have a place,” said Saunders of the National Consumer Law Center. said
But if you want to build your credit score, and you’re able to pay on time, a credit card is a better choice. The same goes if you want strong legal protection against fraud, and clear, centralized debt reporting.
If you’re not sure if you’ll be able to make the payments on time, consider the fees charged by buy-now, pay-later companies that will add fees in addition to the penalties and interest that credit cards offer. Company or other creditor will receive.
How will economic instability affect Buy Now, Pay Later?
As, some shoppers have started splurging on essentials instead of big-ticket items like electronics or designer clothes. A survey released this week by Morning Consult found that 15% of buy-now, pay-later consumers are using the service for routine purchases, such as groceries and gas, a risk among financial advisors. The bell is ringing.
Hicks points to the rising number of delinquent payments as a sign that buy-now, pay-later can contribute to already unmanageable debt for consumers. A July report by Fitch Ratings found that fraud on apps rose sharply in the 12 months ending March 31, up 4.1 percent for Afterpay, while credit card fraud was relatively stable at 1.4 percent. stayed
“It’s going to be interesting to see its growing popularity with these different economic waves,” Hicks said. “The immediate result is what’s happening now.”
The Associated Press is supported by the Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. Azad Foundation is separate from Charles Schwab & Company Inc.