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EXPLAINER: What to know about ‘buy now, pay later’!

Americans have become fond of the “buy now, pay later” services, but the “pay later” part is becoming more difficult for some borrowers.

Buy Now and Pay Later loans allow users to pay for items such as new sneakers, electronics or luxury goods in installments. Companies like Affirm, Afterpay, Klarna, and PayPal have built popular financial products around these short-term loans, especially for younger borrowers, who fear never-ending credit card debt.

Now, with the industry overwhelmed with customers, defaults are escalating. Inflation puts pressure on consumers, making it more difficult to pay off debt. Some borrowers do not budget properly, especially if they are persuaded to take out multiple loans, while others may be credit risks initially.

said Michael Taiano, an analyst with Fitch Ratings, which co-authored a report in July highlighting some of the concerns about the industry.

The most popular type of buy now, Pay Later allows for four payments over a six-week period — one payment at the time of purchase and three more that borrowers often try to synchronize with payment periods. Long-term loans for large purchases are also available. Most short-term loans have no interest associated with them. Companies that charge interest can clearly state how much the borrower will pay as finance charges.

Given these features, consumer advocates and financial advisors initially saw Buy Now, Pay Plans later as a potentially healthy form of consumer debt if used correctly. The biggest concern has been the late fee, which can be a huge financing fee on a small purchase if the borrower is late on payment. Fees can be as high as $34, plus interest. But now that payments are on the rise, and companies are getting bolder in marketing their products, advocates see the need for additional regulation.

The industry is experiencing rapid growth, according to a report released Thursday by the Consumer Financial Protection Bureau. Americans took out nearly $24.2 billion in loans when they buy now, and pay later programs in 2021, up from just $2 billion in 2019. The industry-wide figure is expected to jump even more. Klarna customers bought $41 billion worth of products on its service globally in the first six months of the year, up 21% from last year. At PayPal, revenue from Buy Now, Pay After Services more than tripled in the second quarter to $4.9 billion.

Jasmine Francis, 29, a technology analyst based in Charlotte, North Carolina, said she used the buy now, pay later service in 2018 to buy clothes from fast fashion brand Forever21.

“I remember I just got on a buggy,” she said. “At first, I thought, ‘Something has to come back,’ and then I saw Afterpay at the checkout—you don’t pay for it now, but you get it now. That was music to my ears.”

It is unclear how correctly customers use to buy now, and pay loans later. Fitch found that delinquencies on these services rose sharply in the twelve months ended March 31, while delinquencies on credit cards remained flat. And, according to the CFPB, an increasing percentage of loans the industry makes are being discounted — or loans it deemed too late to be potentially uncollectible. The industry’s freight rate was 2.39% in 2021, a number that is likely to be higher now given the economic turmoil this year. In 2020, this number was 1.83%.

“This upward trend in defaults continues,” Rohit Chopra, director of the CFPB, said in a call with reporters.

Credit reporting company TransUnion has found that borrowers who buy now and pay later use the product just like credit cards, accumulating debt as well as additional debt. A Morning Consult survey this week found that 15% of customers who buy now and pay later use the service for routine purchases, such as groceries and gas, the type of behavior that raises alarm among financial advisors. The CFPB report also found a small but growing number of Americans using these products for routine purchases as well.

“If these plans buy now, pay later are not adequately budgeted, they can have a cascading effect across an individual’s entire financial life,” said Andre Jean-Pierre, a former wealth advisor at Morgan Stanley who now runs his own financial planning firm. . to help black Americans save and budget adequately.

Another concern among advisors and consumer advocates, as well as Washington lawmakers and regulators, is the ease with which consumers can take advantage of these installment loans.

Speaking at a Senate Banking Committee hearing Tuesday about new financial products, Senator Sherrod Brown, D-Ohio, noted the benefits of plans that allow consumers to pay for things in installments. But he also criticized the way the industry is promoting the plans.

“The ads encourage consumers to use these plans for multiple purchases, in many online stores — which leads to a buildup of debt that they cannot repay,” Brown said.

Short-term loans are likely to be a problem because they are not reported in a consumer credit profile with Transunion and Experian. Moreover, buy now, pay later industry customers tend to be younger – which means they have little credit history. Hypothetically, a borrower could take multiple short-term loans across multiple purchases now, pay later — a practice known as “loan stacking” — and they would never show up on a credit report. If someone puts in a lot of items to buy now, and pay the plans later, budgeting can be difficult.

“It’s a blind spot for the industry,” said Taiano of Fitch.

In a statement, the industry trade group that buys it now and pays later backed down on the characterization that its products could burden borrowers with debt.

“With flexible zero-to-low-interest payment terms, and transparent terms and conditions, BNPL helps consumers manage their cash flow responsibly and lead a healthier financial life,” said Benny Lee, CEO of the Fintech Association.

Meanwhile, buy-now, pay-later providers see rising delinquency rates as a natural consequence of growth, but it’s also an indication that inflation is hitting Americans who are likely to use these services hard.

“We’ve seen some pressure (among those with the lowest credit scores), and those are starting to have a hard time,” said Max Livchin, founder and CEO of Affirm, one of the biggest buy now, pay later companies.

“I wouldn’t call it some sort of prelude to a potential downturn, but it’s not the same kind of smooth sailing it used to be,” he said, adding that Affirm is taking a more conservative approach to lending.

Buy now, pay later in the US after the Great Recession. Analysts said the product was largely untested during a significant period of financial distress, unlike mortgages, credit cards or auto loans.

Despite these concerns, the consensus is buy now, pay later, companies are here to stay. Affirm, Klarna and Afterpay owned by Block Inc. In addition to PayPal and others it is now an integral part of online commerce.

Moreover, the growth of the industry is attracting more players. The tech giant Apple earlier this summer announced Apple Pay Later, in which users can put their purchases into a four-payment plan over a six-week period.

“I generally plan my purchases with PayPal ‘Pay in 4’ so that my purchases are due on my payment dates, as the due dates are every two weeks,” said Desiree Moore, 35, of Georgia.

Moore said she’s trying to use the buy now and pay later plans to cover purchases that don’t fall into her regular monthly budget, so she doesn’t take money from her children’s needs. Plans have been increasingly used with inflation making items more expensive and so far they have been able to keep up with payments.

Frances, the technical analyst, said it’s now common among her friends to pay for travel with installment loans, and not completely drain their bank accounts in an emergency.

“If you come home from vacation with two flat tires, and you just spent all that money on plane tickets, that’s $400 you don’t have right now,” she said. “Most people don’t have savings. They just have enough for those flat tires.”

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Cora Lewis, the Associated Press’s personal finance reporter, contributed to this report from New York.

Copyright © 2022 by The Associated Press. All rights reserved.

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