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Since the start of the coronavirus pandemic, the “Buy Now, Pay Later” option has grown in popularity, especially among young and low-income consumers who may not have access to traditional credit.
Whether you’ve shopped online for clothes or furniture, sneakers or concert tickets, you’ve seen the option at checkout to pay off the cost in small installments over time. Companies like Afterpay, Affirm, Klarna and Paypal all offer this service, with Apple set to enter the market later this year.
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But with increasing economic instability, crime is also increasing. Here’s what you need to know.
How does the Buy Now Pay Later process work?
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 sign up to pay in weekly or monthly installments. Some companies, such as Klarna and Afterpay, perform soft credit checks that are not reported to the credit bureaus before approving borrowers. Most are approved in minutes. Scheduled payment fees are automatically deducted from your account or charged to your card.
Services usually don’t charge you more than you owe, meaning 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 amount you owe. These will be charged with an additional $34 interest. If you miss too many payments, you may be barred from using the service in the future and may affect your credit score.
Are the products I purchased protected?
In the US, buy-now-pay-later services are currently not covered under the Credit Act, which regulates credit cards and other types of loans (repaid in more than four installments).
This means that it will be more difficult to resolve disputes with merchants, return items, or get your money back in cases of fraud. Companies can offer security, but they don’t.
Lauren Sanders, associate director of the National Consumer Law Center, advises borrowers to avoid consolidating credit cards. If you do, you’ll lose the security you get from using a credit card, while leaving yourself open to interest from the card company.
“Use a credit card directly and get those protections,” he said. “Otherwise, it’s bad for both sides.”
What are the other risks?
Because there’s no centralized report of Buy Now, Pay Later, those loans won’t show up on your credit profile with the major credit rating agencies.
That means more companies can let you buy more stuff, even if you can’t afford it, because lenders don’t know how many loans you’ve set up with other companies.
Your on-time payments are not reported to the credit rating agencies, but late payments are.
“Buy now and pay later generally doesn’t help build credit, but it can hurt,” Sanders said.
Elise Hicks, consumer policy adviser for Americans for Financial Reform, a progressive nonprofit, said people don’t give enough consideration to whether they can make payments on time.
“Because of inflation, people might think, ‘I have to get what I need and pay these installments later,'” but “can you afford the things you’re going to buy six months from now?” He said.
Why do retailers offer buy-now-pay-later convenience?
Retailers accept backend fees for buy-now, pay-later services as products increase the volume of purchases. When shoppers are given the option to pay for purchases in installments, they are more likely to buy more items at once.
When Apple recently announced it was building its own Buy Now Pay Later feature, 23-year-old Josiah Herndon posted on Twitter, “I’m buying 6 things I can’t buy at Apple, Klarna, Afterpay, PayPal Pay.”
Herndon, who works in insurance in Indianapolis, said she started using the services because it took so long to get approved for a credit card because she didn’t have an extensive credit history for her age. He used them to pay for high-end clothes, shoes and other luxury items. Herndon said she lines up the payment schedule with her paychecks so she doesn’t miss installments, calling the option “very convenient.”
Who Should Use Buy Now Pay Later?
If you have the ability to make all payments on time, buy-now, pay-later loans are a relatively healthy, interest-free form of consumer credit.
“If (the loans) perform as promised, people can avoid late fees and if they don’t have trouble managing their finances, they can use the facility,” said Sanders of the National Consumer Law Center.
But if you want to build your credit score and you can make your payments on time, a credit card is the best option. A credit card is great if you want strong legal protections against fraud and clear, centralized credit reports.
If you’re not sure if you’ll be able to pay on time, the fees and penalties charged by buy-now, pay-later companies can add up to higher fees than the interest charged by a credit card company or other lender.
How does economic instability affect the buy-now-pay-later service?
As the cost of living continues to rise, some shoppers are beginning to split payments on essentials rather than big spenders like electronics or designer clothes. A Morning Consult survey published this week found that 15% of buy-now-pay-later customers use the service for routine purchases like groceries and gas, ringing alarm bells among financial advisers.
Hicks points to the rising number of delinquent charges as a sign that buy now, pay later can contribute to already unmanageable debt for consumers. A July report by Fitch Ratings Agency showed that app crime rose sharply in the 12 months ended March 31, rising to 4.1% in afterpay, while credit card crime was a relatively flat 1.4%.
“Its increasing popularity will be interesting to watch these different economic tides” “The immediate decline is what is happening now,” Hicks said.
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