Buy now, pay later loans: advantages and risks, pros and cons

Buy now, pay later (BNPL) loans offered by services like Affirm, Klarna and Afterpay are exploding in popularity, and it’s easy to see why.

This trendy new type of loan allows consumers to pay for their online purchases in a few interest-free installments over a period of weeks or months. Approval is usually quick and easy, as it happens seamlessly on an online retailer’s checkout page.

As online shopping has increased during the pandemic, the ubiquity of BNPL funding has also increased. A new study from the Consumer Financial Protection Bureau (CFPB) found that the number of BNPL loans issued by five major lenders increased by 970% between 2019 and 2021. Loans were worth $24.1 billion in 2021, up from $2 billion in 2019 .

BNPL products can offer serious advantages, but they also have disadvantages. Among other concerns, these loans are “designed to encourage consumers to buy more and borrow more,” CPFB said in a press release, putting borrowers at greater risk of getting into debt they cannot repay. .

This is why the CFPB has announced its intention to regulate BNPL lenders the same way it treats credit card companies.

BNPL leaders applauded the CFPB’s efforts to improve transparency and consumer protection in the industry. Affirm CEO Max Levchin called the new report a “big step forward for honest finance” on Twitter.

“Consumers deserve absolute clarity,” Levchin wrote, “and should have the flexibility to pay over time without late fees, recurring or deferred interest.”

Klarna CEO, Sebastian Siemiatkowski tweeted that he looks forward to working with the CFPB to “accelerate sound and proportionate industry regulation that will drive competition and improve outcomes for all consumers”.

Here’s everything you need to know about the pros and cons of buy now, pay later loans – the credit card alternative often touted as the next big thing in online shopping.

What are the advantages of BNPL loans?

BNPL lenders tout their products’ ease of use, smooth interfaces, and the fact that they can be cheaper than other forms of consumer credit. Not to mention their ability to extend financing to those who may not qualify for credit cards or personal loans due to poor or limited credit history.

“The financial and operational benefits [of BNPL loans] legacy credit products are real and important,” reads the CFPB report. Here is an overview of these benefits:

Of no interest

BNPL lenders generally do not charge interest on installment payments. This is a major attraction for consumers.

No late fees

Some BNPL lenders do not charge late fees, but others do. It is important to understand the terms of the loan before finalizing a transaction.

Easy repayment structure

Most BNPL loans are designed to be repaid in four installments over a few weeks. Once that loan is paid off, it’s gone — there’s no revolving line of credit like there is with a major credit card. And since many BNPL lenders allow automatic payment (and require customers to keep a debit or credit card on file), consumers are less likely to forget a payment. Unfortunately, the mandatory automatic payment can also lead to problems such as overdrafts, notes the CFPB.

Quick approval

Online buyers can be approved for a BNPL loan in seconds.

What are the risks of BNPL loans?

The advantages cited above can all be outweighed by the disadvantages. BNPL loans can encourage overspending and excessive borrowing, and they don’t come with the built-in protections that credit cards have. Consumers should understand these risks before using a BNPL loan:

Unsustainable debt

The CFPB warns that the ease of taking out a BNPL loan can lead consumers to take out too many loans at once and accumulate more debt than they are able to repay. Regularly taking out BNPL loans for a long period could also lead to financial stress, the CFPB said.

Credit rating damage

Credit bureaus like Equifax are beginning to incorporate BNPL data into credit reports. That might be a good thing for many (an on-time payment history will boost your credit score), but it also means that a late BNPL payment could hurt your score and make it harder and more expensive to borrow on any line.

Costs

Some BNPL change service fees and late fees. According to the CFPB, BNPL’s late fees are typically around $7 per missed payment for loans of around $135, but the fee structure varies by lender.

hidden interest

If you fund a BNPL loan with a credit card that you don’t repay in full, you’ll end up paying interest on a supposedly “interest-free” transaction.

Data privacy issues

“Buy now, pay later, lenders can gather extraordinarily detailed information about your buying behavior unlike traditional cards,” CFPB director Rohit Chopra said recently. warned. Lenders can use this data to encourage users to spend and borrow more, he said.

Fewer consumer protections than credit cards

BNPL loans are a very recent innovation. The regulations surrounding these products are not as strict, and consumers have fewer protections should something go wrong. It may be more difficult to resolve disputes or return products purchased with a BNPL loan compared to products purchased with a credit card.

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