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CR highlights potential risks of buy now, pay later loans as more consumers turn to popular payment plans during the holidays

CR offers tips to avoid problems and calls for stronger consumer protections 

YONKERS, NY — As the holiday shopping season kicks into high gear with Black Friday approaching, Consumer Reports is calling attention to some of the risks consumers can face with buy now, pay later loans. CR is advising shoppers to be aware of some of the pitfalls of these popular payment plans and is urging the Consumer Financial Protection Bureau in a new report to adopt stronger protections for consumers.

The most typical buy now, pay later loans are the so-called “Pay in 4” products, where consumers pay 25 percent of the cost of the item they are buying at the time of sale, and the remaining balance in three additional payments of 25 percent over the next 6 weeks. Leading U.S. providers such as Afterpay, Affirm, Klarna, Sezzle, Paypal and Zip all offer “Pay in 4” options at zero percent interest.

“Millions of shoppers are turning to buy now, pay later plans as a convenient way to obtain credit and manage expenses,” said Chuck Bell, advocacy program director for Consumer Reports. “But these loans can turn into ‘buy now, regret later’ when consumers have trouble getting refunds, making returns, or keeping up with payments and get hit with unexpected fees and penalties. The CFPB should strengthen oversight of this largely unregulated market and adopt rules to ensure consumers are treated fairly and get the same protections that come with other forms of credit.”

Most consumers who use the service have a positive experience, according to an August 2022 nationally representative Consumer Reports survey. CR found that 86 percent of users were somewhat or very satisfied with the plans and a similarly high number said they would probably or definitely use the service again. However, 28 percent reported experiencing at least one problem, including being overcharged on a purchase or having difficulty with returns or refunds.

It can be hard to get refunds after returning items: Frustrating experiences with returns and refunds is a common consumer complaint according to the CFPB. Consumers using these payment plans have to contact both the merchant and the payment company, instead of just working with the merchant to process a refund as they would with other forms of credit. In the meantime, they can be required to make payments under the terms of the loan for an item they no longer want or that they have returned.

You Can Be Stuck With Few or No Protections for Your Purchases: Consumers can find themselves on the hook for payments even though the merchandise they purchased never got delivered or arrived damaged. In CR’s survey, 10 percent of people who have used a buy now, pay later service said they had difficulty getting refunds or stopping payment for items they returned or never received, or trouble adjusting payments after making changes to a purchase.

You May Overextend Yourself, Especially if You Get Multiple Loans: Buy now, pay later loans are not subject to the same kind of underwriting standards as other forms of credit so they are easy and fast to get. But this can lure consumers into making impulse purchases and taking out more loans than they can manage. This is particularly true for frequent users of these services. People who are juggling four or more of the loans at once reported missing a payment at twice the rate of those with fewer loans in CR’s survey.

It’s Easy to Miss Payments and Get Stuck With Penalties: People who miss payments can get socked with unexpected penalties, including late fees or interest charges, and could have the missed payment appear on their credit report. Eleven percent of the buy now, pay later users in CR’s survey missed at least one payment, in some cases because they lost track of when it needed to be paid, or didn’t realize the payment was due. Some said they thought they’d set up automatic payments only to find out the payment wasn’t withdrawn automatically. Others thought they’d canceled their purchase and later learned the payments still went through.

It Could Hurt Your Credit Score: One benefit of using buy-now, pay-later loans is that you may be able to apply and be approved for one without it hurting your credit score, as can be the case with many other loans. But late payments could still cause damage to your credit score. CR’s survey found that among people who had at least one late payment, 15 percent said that information was reported on their credit report. And 21 percent had their debt turned over to a collection agency.

Tips for Consumers: To help minimize the risks associated with buy now, pay later loans, Consumer Reports is encouraging consumers to follow these tips:

  • If you need to return an item you’ve purchased, contact the merchant first, and ask them to accept the return and process the refund. Then, check with the buy-now, pay-later service to confirm your refund was credited. If it was not, ask if you can have an extension on the loan; it’s possible that the refund will be credited to your loan before the next due date.
  • Be especially wary of using a buy now, pay later virtual credit card, which don’t provide the same protections with returns as traditional credit cards.
  • Consider using a credit card instead if you have one, because most cards offer some level of purchase protection if items are damaged in shipping, lost, stolen, or arrive but not as advertised.
  • Set up autopay to avoid missed payments and be sure to read the fine print of the loan terms so you won’t be surprised by late fees or other charges
  • Try to have no more than one or two buy now, pay later loans at a time and stick with a single provider so you are not forced to juggle multiple loans with multiple vendors.
  • Notify the companies if you can’t pay on time—you may be able to reschedule a payment for a later date.

Stronger Consumer Protections Needed:  CR is calling on the CFPB to adopt reforms that would require buy now, pay later lenders to:

  • Provide consumers with “chargeback rights” so they can withhold payment for disputed charges while the loan issuer and merchant investigate the issue.
  • Clearly state repayment terms and late fees in a standardized fashion as required by the Truth in Lending Act for other forms of credit.
  • Base lending decisions on the consumer’s full credit history and report their payment record to the major credit bureaus in a standardized fashion. Provide periodic billing statements to help customers track payments coming due.
  • Protect customers from having late payments related to returns and payment disputes show up in their credit reports.
  • Abide by clear standards that ensure fast, efficient resolution of returns and payment disputes.

For a more detailed analysis of buy now, pay later loans and CR’s policy recommendations, see Buy Now, Pay Later: Consumer Protections Needed for the Popular New Way to Pay

Michael McCauley, michael.mccauley@consumer.org, 415-902-9537