- An investigation by the CFPB found that “buy now, pay later” programs can save consumers more money than credit cards.
- That’s assuming consumers aren’t late on payments, or “stack” loans when they can’t pay a bill.
“Buy now, pay later” shopping has soared in popularity over the course of the pandemic. And it looks like it might have some long-term benefits for shoppers, the Consumer Financial Protection Bureau said in a report this week.
The government watchdog stressed that it wanted to implement more protection measures for the layaway-like products, which are usually installment loans that let customers divide purchases into multiple equal payments. Affirm, Afterpay, Klarna, and PayPal’s “Pay 4” option are among the most popular, growing in use among Gen Z buyers especially.
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The CFPB ultimately found that these products can be cheaper than credit cards and easier to use, essentially offering consumers what they promise. If you’re using one with no interest and pay off your loan installments on time, you’re not paying extra for a purchase. And you didn’t have to go through a credit card company to get it.
The CFPB said it was looking to create “advisory opinions” and codify regulations that would bring more credit card-style protections to BNPL services. A common regulation for credit cards includes fraud protection, for instance, available for major credit card users and secured by federal law.
“We will be working to ensure that borrowers have similar protections, regardless of whether they use a credit card or a Buy Now, Pay Later loan,” CFPB Director Rohit Chopra said in a statement.
Overall, however, BNPL “imposes significantly lower direct financial costs on consumers than legacy credit products,” the report said.
And “the nature of the product structure and underwriting strategy” could reduce “overspending and debt cycles,” the CFPB said.
After the report was released, BNPL stocks slipped slightly.
The CFPB report said that BNPL loans in the US increased by 970% between 2019 and 2021. That’s 180 million transactions among the five major lenders, with the value of those loans jumping as well — 1,092%, to $24.2 billion.
Here are three findings about BNPL products from the CFPB that you should know before using one:
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BNPL is more accessible and has lower financial costs than traditional credit cards
The BNPL report lists some safety caveats about data sharing, but it’s mostly positive for BNPL, which the CFPB anticipates will become a growing force in consumer life. The report noted that loan approval rates are rising, with 73% of applicants approved for credit in 2021, up from 69% in 2020.
There are several “competitive benefits” to using a BNPL loan over a credit card one, the report said: there is no interest on a BNPL loan and sometimes no late fee, they’re ubiquitous, easy to access, and have a very straightforward repayment structure, the CFPB found.
Consumers should beware of getting caught up in “loan stacking,” late fees, and other risks
BNPL products are cheap and easy to use, which might make their risk factors less obvious, the CFPB said.
“Loan stacking” is one danger — it’s when a consumer has multiple loans outstanding among multiple BNPL providers, which could lead to “debt traps” from unethical lenders, the CFPB said. That’s when unethical lenders seek out debtors they know have existing debt they need to pay off.
The report also noted that BNPL borrowers face some problems when it comes to returning products, and that the “autopay” function on BNPL loans puts borrowers at risk of overdraft fees.
Additionally, they said, privacy and data sharing are concerns; BNPL firms use consumer data for advertising, for instance, and monetize the data it collects.
CFPB wants to implement similar shopper protections to credit cards
Chopra emphasized that as they become more widely used, the CFPB wanted to make BNPL loans offer the same protections as major credit cards.
“Borrowers seeking Buy Now, Pay Later credit may encounter products that do not offer protections that are standard elsewhere in the consumer financial marketplace,” the CFPB said in its statement. “These include a lack of standardized cost-of-credit disclosures, minimal dispute resolution rights, a forced opt-in to autopay, and companies that assess multiple late fees on the same missed payment.”
