Black Friday: What you should know about

As consumers gear up for their holiday shopping this year, some may turn to “buy now, pay later” loans for gift purchases, especially young and low-income consumers who may not have access to traditional credit. cannot be accessed.

But financial experts are cautioning shoppers to be aware of the hidden financial risks with these popular loans. If you’ve shopped online for clothes or furniture, sneakers or concert tickets, you may have seen the option at checkout to break up the cost into smaller installments over time. Companies like Afterpay, Affirm, Klarna and Paypal all offer the service, with Apple due to enter the market later this year.

But with increasing economic instability, crimes are also increasing. A September report released by the Consumer Financial Protection Bureau (CFPB) explores the consumer risks involved in buy now, pay later (BNPL) plans, a market that is mostly unregulated and has limited opportunities provided by other types of credit loans. There is a lack of equal protection to be done. ,

risk of overspending

“One of the biggest risks of using buy now, pay later is the holidays,” Anne Millerbird, personal loan expert at NerdWallet, said in an email. “A recent NerdWallet study found that consumers who used BNPL in the past year did so an average of six times more.”

Experts said staying on top of multiple BNPL loans could be difficult. Millerbird recommends using a BNPL for a gift or one retailer, and then paying off that debt before taking on another.

Buyers who use BNPL loans typically spend 10% to 40% more when paying off these loans than with credit cards, according to new research by Harvard Business School researchers. Because loans break up purchases into smaller installments, it can entice shoppers to buy larger priced items.

What you need to know about BNPL plans before agreeing to them.

How does buy now, pay later work?

Branded as “interest-free loans”, the buy now, pay later services require you to download an app, link a bank account or debit or credit card, and pay in weekly or monthly installments Must sign up. Some companies, such as Klarna and Afterpay, perform soft credit checks, which are not reported to credit bureaus, before approving borrowers. Most are approved within minutes. The scheduled payments are then automatically deducted from your account or charged to your card.

Services typically don’t charge you more, which means there’s technically no interest, as long as you pay on time.

But if you make late payments, you may be charged a fixed fee or the fee may be calculated as a percentage of your total outstanding. It can be as high as $34 plus interest. If you miss more than one payment, you may be barred from using the service in the future, and defaults can hurt your credit score.

Is my purchase secure?

In the US, buy now, pay later services are not currently covered by the Truth in Lending Act, which regulates credit cards and other types of loans (that are paid in more than four instalments).

This means that you may find it more difficult to settle disputes with merchants, return items, or get your money back in the case of fraud. Companies may offer security, but they don’t have to.

Lauren Saunders, associate director of the National Consumer Law Center, advises borrowers to avoid linking credit cards to buy now, pay later apps whenever possible. If you do this, you lose the security you get from using a credit card as well as open yourself up to the interest of the card company.

“Use credit cards directly and get those protections,” she said. “Otherwise, it’s the worst of both worlds.”

What are the other risks?

Since there is no centralized reporting of Buy Now, Pay Later purchases, those loans do not necessarily appear on your credit profile with the major credit rating agencies.

This means more companies can allow you to buy more items even if you can’t afford them, because lenders don’t know how many loans you’ve established with other companies.

Your timely payments are not reported to the credit rating agencies, but missed payments are.

“Buy now, pay later generally can’t help you build credit, but it can hurt,” Saunders said.

Elise Hicks, a consumer policy consultant at Americans for Financial Reform, a progressive nonprofit, said people may not seriously enough consider whether they’ll still be able to make payments down the road.

“Because of inflation, people may think, ‘I have to get what I want and pay later in these installments,'” she said. “But will you still be able to afford the things you’re doing six months from now?”

Why Retailers Offer BNPL Loan?

Retailers accept backend fees for buy now, pay later services as products increase the size of the cart. When buyers are given the option of paying for purchases in instalments, they are more likely to buy more at once.

When Apple recently announced it would be building its own buy now, pay later service, 23-year-old Josiah Herndon joked on Twitter, “About paying for 6 carts of (things) I can’t see at Apple.” Cannot pay with Klarna, Afterpay, PayPal Pay. 4, Shop Pay in 4, and confirm.”

US household debt climbs


Herndon, who works in insurance in Indianapolis, said she started using the services because it was taking a long time to get approved for a credit card, as her age meant she didn’t have an extensive credit history. was. Since then he has been using them to pay for expensive clothes, shoes and other luxuries. Herndon said he lines up the payment schedule with his paycheck so he doesn’t miss installments, and called the option “very convenient.”

Who Should Use Buy Now, Pay Later?

If you have the ability to make all payments on time, a buy now, pay later loan is a relatively healthy, interest-free form of consumer credit.

“If (the loans) work as promised, and if people can avoid late fees and not have trouble managing their finances, then there is a place for them,” said Saunders of the National Consumer Law Center.

But if you want to build your credit score, and you are able to make payments on time, then a credit card is a better option. The same goes if you want strong legal protection against fraud, and clear, centralized reporting of loans.

If you’re unsure whether you’ll be able to make the payments on time, consider buying now, paying later. Fees charged by companies include penalties and interest charged by the credit card company or other lender. There will be higher charges involved in comparison.

How will economic volatility affect Buy Now, Pay Later?

In form of cost of living increases, some shoppers have started paying down on essentials rather than big-ticket items like electronics or designer clothing. A survey released this week by Morning Consult found 15% of Buy Now, Pay Later customers are using the service for routine purchases, such as groceries and gas, ringing alarm bells among financial advisors.

Hicks points to the rising number of outstanding payments as a sign that the buy now, pay later approach may already be contributing to unmanageable debt for consumers. A July report by Fitch ratings agency found delinquencies on apps rose sharply in the 12 months ended March 31, as high as 4.1% for Afterpay, while credit card delinquencies remained relatively stable at 1.4% .

“It will be interesting to see its growing popularity play out in these different economic ripples,” Hicks said. “The immediate fallout is what’s happening now.”

The Associated Press is supported by the Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The Independent Foundation is separate from Charles Schwab & Company Inc.

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