By Randy Hutchinson
President of the BBB of the Mid-South
Reprinted from The Jackson Sun
Buy Now, Pay Later (BNPL) is a type of loan that lets you take an item home immediately while paying for it in bi-weekly instalments. The concept dates to the 19th century as a means for consumers to buy high-value goods, but it’s exploded in the past two decades (even more during the pandemic as ecommerce has boomed) and is now being used for small-dollar purchases also.
Rohit Chopra, the Director of the Consumer Financial Protection Bureau, said, “Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too.”
Consumers usually encounter the BNPL option when shopping online or through a mobile app, although some brick-and-mortar stores also offer it. A common repayment plan involves making a small down payment at the time of purchase and then spreading the balance over four bi-weekly payments that are charged to a bank account or debit or credit card. Most BNPL loans don’t carry any interest and the application process is quicker and less cumbersome than applying for other forms of credit. The lender may not pull a credit report.
According to Credit Karma, more than 4 in 10 Americans have used a BNPL loan. Experts say they’re particularly popular among younger adults and lower-income consumers. The average transaction is about $200 and some users take them out on a frequent basis.
Merchants like the product because it increases the percentage of visitors to their website who make a purchase and the average ticket is higher. RBC Capital Markets estimates the increases are 20-30% and 30-50%, respectively. It also lets merchants avoid the hassles associated with layaway plans, such as storing the merchandise and having to process payments themselves. They typically pay a fee of 3 to 6 percent of the purchase price to the BNPL lender.
There are about two dozen companies offering BNPL loans, including Affirm, Klarna, Afterpay and PayPal. Mastercard recently announced that it’s going to enable banks and fintechs in its network to offer the loans. Terms and features differ among the providers, with some offering longer term loans that charge interest.
According to Aimee Picchi in an article on CBS MoneyWatch, experts say “When BNPL loans work smoothly, such as when consumers have no problems with the products they bought and they make their payments on time, they can be convenient.” But the Consumer Financial Protection Bureau has opened an inquiry into them based on these concerns:
- The ease of getting the loans may cause consumers to end up spending more than they planned or can afford.
- Some protections that apply to credit cards may not apply to BNPL loans. For example, users may not be able to dispute a charge if something goes wrong or may have trouble getting a credit for returned merchandise.
- Most BNPL lenders charge hefty late fees consumers may not be know about.
- Some lenders have used data collected about users to push specific brands and products from partner retailers. The CFPB wants to better understand behavioral targeting and other practices that may pose risks to consumers.
If you decide to use a BNPL loan, be sure you understand all the terms and risks.