On a recent weekday, too tired to cook, my wife and I ordered takeout from Chipotle. The food came quickly, but the bill will take time. Thanks to a small loan that the new fintech company gave me, I don’t have to pay for the two burritos, nor the soft drinks and the side dishes until 35 days.
When so-called “buy now, pay later” (BNPL) loans from fintech companies emerged a few years ago as a way to pay for purchases in installments, they were marketed as an option for moments of splurge, like when you buy an expensive pair of shoes or a new TV. They are usually short-term and interest-free.
But as more and more retailers have started offering these types of payment plans in the last year, so has the variety of things that retailers Consumers can buy with a BNPL loan, including groceries and household items.
BNPL lenders say their products provide an alternative to potentially high-interest credit cards and allow people to better manage their budget. Plus, they have built-in protections so customers don’t face significant adverse financial consequences if they miss a payment.
Many consumers have chosen to use these services. About 1 in 5 Americans have used a BNPL service, according to a nationally representative survey of 2174 American adults (PDF) conducted in January 2022 by Consumer Reports. And many people have shared stories with CR about these services and say they would use them again.
BNPL spending now accounts for nearly 4% of US online retail transactions, according to a report by FIS, a financial technology company, published in February. This is a number that will surely increase as financing options grow.
But consumer advocates say BNPL’s advancement in almost every facet of purchases is raising concerns about the new financing trend, which they say may in fact have consequences costly finances and lead people to unsustainable levels of debt. They point out that there are penalties and may also have interest charges for missing more than one payment. And they don’t offer the same consumer protections that credit cards offer.
“One of the biggest problems we’ve seen with ‘buy now, pay later’ is that, in general, they don’t it is evaluated whether the people who use this financing have the ability to pay”, says Marisabel Torres, from the Responsible Lending Center, a consumer defense organization.
These concerns have drawn the attention of the Regulators: In December, the Consumer Financial Protection Bureau opened an investigation into the business practices of 5 leading providers of BNPL in the United States including Affirm, Afterpay, Klarna, PayPal and Zip.
Chuck Bell, a financial policy advocate at Consumer Reports, says some consumers may struggle to keep track of automatic payments on small loans from multiple BNPL lenders, which, unlike the Most financial institutions typically do no more than a “simple” credit inquiry before lending money.
In fact, a survey conducted in August 2021 on behalf of the financial institution Credit Karma discovered that the 34% of consumers who used BNPL services were late in one or more installments. The survey revealed that 72% of those who missed a payment thought that their credit score had dropped as a result of that situation.
Personal bankruptcy filings also show that people who are already in financial difficulties find it easy to turn to BNPL lenders. A Florida woman who filed for bankruptcy in 2020 listed 43 Individual loans from a single lender in your bankruptcy petition.
Another concern: Consumers may spend more than they normally would without a BNPL service, advocates say. In the CR survey, 47% of people who said they used a BNPL loan said they did not have enough money to buy what they wanted and that this service allowed them to pay for it.
“A loan with 0% interest and payment in 4 installments can be a great opportunity if you are sure that you will have the funds to repay the money”, says Bell from CR. “But it can be a risky proposition for people living paycheck to paycheck, who may take on more debt than they can reasonably afford to pay back. People are understandably afraid of taking on credit card debt, but you can also rack up a lot of BNPL debt, which will have a similar negative impact.”
Scores drop
Failure to repay a BNPL loan on time can hurt a client’s credit score, something New York resident Alana Cimillo says she found out the hard way.
In 2019, Cimillo learned that her ex-fiancé used her Social Security number without her knowledge to obtain 23 Affirm loans, according to allegations included in a lawsuit filed in November, and allegedly failed to pay in full 18 of these loans.
It wasn’t until she was contacted by an Affirm-contracted collection agency that Cimillo understood the scope of the problem, the lawsuit says. Cimillo reported what she describes as identity theft to the police and challenged the loans directly with Affirm several times during 2019. But Affirm ultimately concluded that the loans were valid and that Cimillo was responsible for repaying them, the suit alleges. (CR does not name the ex-fiancé because he has not been criminally charged).
In the middle of 2021, the lawsuit says, Cimillo received alerts from that his FICO credit score had dropped from almost 800 to 674. She felt the consequences when she went to buy a car in July and was told by the dealer that she was not eligible for the 0.9% promotional interest rate on the car loan, “and that the best interest rate I could get would be 4.9%.” %”, as detailed in his complaint.
Affirm refused to comment. Adam Singer, Cimillo’s attorney, declined to comment specifically on the case because the litigation is still pending, but says it is worrying that consumers can take out so many BNPL loans at once. He wouldn’t be surprised, he says, if someone lost control of payment dates, given the potentially high number of loans and that if one were to default, the consumer would likely see an impact on his credit score.
“They could have excellent credit, and all of a sudden go into serious delinquency,” he says.
Policies on whether delinquent loans are reported to a credit bureau vary by lender. Afterpay and Klarna, for example, say they don’t report late fees to credit bureaus. Affirm says that some delinquencies end up being reported, as does paying some installments on time.
While Cimillo’s case is an extraordinary example of how small BNPL loans can cause problems for a consumer, CR’s Bell says his situation highlights the potential risks of making loan plans payment are available to pay for just about anything.
“The popular idea of BNPL loans is that borrowers selectively use them to buy one or multiple items at the same time,” he says. “But some users were able to stack multiple loans, similar to a revolving line of credit.”
“Some BNPL products allow you to spend a high credit limit, but unlike credit cards, they are not regulated to require an evaluation of payment capacity or to provide account statements regular consolidated”, he adds. “The borrower might underestimate the risk of charging a lot of purchases to his account.”
When an interest-free loan is not so interest-free
Another unusual feature of BNPL loans is that, unlike most debt, consumers can sometimes use credit cards to make their payments, says Torres, of the Center for Responsible Lending. Credit card companies generally do not allow certain types of debt payments.
In his testimony before Congress last November, Torres pointed out that credit cards, for example, cannot be used to make payments on federal student loans or monthly debts on another card of credit. Those concerns led at least one company, Capital One, to announce that it would no longer allow customers to use their credit cards to make BNPL payments, according to news reports. (Capital One is testing its own BNPL option, according to other news).
“That’s not the best thing for consumers,” Torres tells CR regarding the possibility of using credit cards to make these payments. About a third of credit card accounts were carrying balances in the third quarter of 2021, according to the American Bankers Association, making their debt much more expensive.
BNPL lenders say that most customers use a debit card or bank account to make payments, but some BNPL consumers use credit cards.
Affirm says that consumers “can pay the first payment and installments with a credit card”.
Afterpay, in a statement, said that 95% of customer payments are made on time and that 90% of transactions are made with debit cards.
“Technically, it is possible for a customer to use a credit card to make an Afterpay payment, and if that customer decides to draw their credit card balance, they may be charged interest ”, says Afterpay.
Klarna says that the “vast majority” of its customers use debit cards or direct withdrawals from bank accounts to make payments. PayPal did not respond to questions about credit card payments, and a Zip spokesperson had no comment before press time.
A loan of $10 for paper towels
BNPL lenders generally set a Minimum amount you must spend to receive financing. To order Chipotle through Zip, for example, I had to spend at least $35.
The company, like most lenders, requires users to pay the 25% in advance and then pay the remaining balance in 4 equal fortnightly installments. In the case of Zip, there is a fee of $1 per installment, which means that my installments came to $9.75 each .
With $10, Klarna, at least for now, it seems to set the loan threshold lower. When cleaning up after our Chipotle feast, my wife and I realized we were out of paper towels, so I signed up for Klarna and within minutes, ordered $10 from Target on a payment plan. My 4 installments came to around $2.60 each.
While it is possible that most consumers are not inclined to take out a $ paper towel loan , the ability to finance anything is likely to increase.
For example, a new startup, Zilch, will launch in the United States in the coming months, according to a spokesperson, and the company’s service can be used to pay for any thing, even a coffee from a local coffee shop. (The spokesperson says that the average transaction for its BNPL installment product in the UK, where Zilch currently operates, ranges from $65 and the $90).
“Consumers tend to think that they will have more money to pay their bills next month or the month after that,” says Bell. “The BNPL payment method is based on you believing you can make a purchase in installments that are due in the next six to eight weeks. But why would you want to finance recurring expenses like groceries with BNPL? It is very likely that next month you will buy those things again, so you will have last month’s bills in addition to the current ones”.
Everything you need to know about “buy now” loans , pay later”
Advocates and financial experts say that consumers could consider using credit cards instead of BNPL loans. Credit cards have protections that BNPL loans do not match. If there is a dispute about a charge, or a refund needs to be made, credit card issuers will pause payment until the issue is resolved. Conversely, some customers have reported having trouble getting refunds for items that were purchased with a BNPL loan, but were never delivered due to pandemic-related supply chain issues.
In addition, many credit cards offer great cash-back rewards for purchases, as well as rental car insurance, extended warranties, and protection for items that are damaged or stolen. If you pay your bill on time, credit card issuers report your good behavior to the credit bureaus, which can help you improve your credit score.
Some BNPL lenders may send delinquent loans to debt collectors, although each has different terms on how to do so. If you apply for a BNPL loan, be sure to read the fine print on how payments and collections can be handled.
“Don’t just click through website or app permission screens on the fly,” says CR’s Bell. “You could easily miss data you need to know.”
Disclaimer: This article has been updated to include additional Affirm information.
Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2022, Consumer Reports, Inc.
Consumer Reports has no financial relationship with advertisers on this site. Consumer Reports is an independent, nonprofit organization that works with consumers to create a fair, safe, and healthy world. CR does not endorse products or services and does not accept advertising. Copyright © 2022, Consumer Reports, Inc.