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New buy now, pay later plans come with high interest rates and other risks that may trip up consumers

Consumer Reports offers shoppers tips to avoid problems and calls for stronger consumer protections 

YONKERS, NY – Buy now, pay later plans are commonly marketed as interest-free loans, but that’s not always the case as providers expand into longer term options, according to Consumer Reports. CR is advising shoppers to be aware of some of the pitfalls of these payment plans and is urging the Consumer Financial Protection Bureau to adopt stronger protections for consumers.

“Buy now, pay later payment plans have exploded in popularity in recent years because they are typically promoted as a “free” service and not a loan,” said Jennifer Chien, senior policy counsel for financial fairness at Consumer Reports. “Despite the marketing claims, consumers can end up paying steep interest charges if they take out a longer term or larger buy now, pay later loan or incur fees if they are late making a payment.”

The most common BNPL loans are the “pay in four” products, where consumers pay 25 percent of the cost of the item at the point of sale, and the remaining balance in three payments of 25 percent over the next six weeks, with no interest or fees. But companies like Affirm, Klarna, PayPal and Sezzle also offer other kinds of loans with longer terms that can come with high interest rates, including some that are more costly than if you paid with a credit card. Eleven percent of consumers who got a BNPL loan in 2021 had one that charged interest, according to a survey from the Financial Health Network.

Unfortunately, it’s not always clear to people when they sign up which of these loans they are getting and they may not be aware of the additional risks posed by longer-term BNPL loans. Unlike “pay-in-four” BNPL loans, some of these newer offerings can trigger a hard check on your credit, which can lower your credit score. And failing to pay on time can also make your credit score dip. It’s also possible that these longer-term loans, by making big-dollar advances so readily available, may tempt consumers to spend more than they intend or can afford to pay back, especially when interest is added in.

These longer term BNPL loans can be very expensive and come with high fees for late payments. In addition to charging interest rates as high as 36.99 percent, consumers can be socked with a $30 fee for missing a single payment. In fact, a long-term BNPL loan could be even more expensive than charging the purchase on a traditional credit card for those who have one. For example, a $2,500 BNPL loan paid in 24 months with an APR of 36.99 percent would cost $1,074 in interest, versus $672 at 24 percent, the average for credit cards according to the online lending marketplace Lending Tree.

In addition, when you make a purchase using a short or long-term BNPL loan, you don’t get the same “chargeback” rights that come with credit cards. As a result, if you need to return a damaged product or never even received it, you have to contact the seller (and ideally also the lender) before you can stop making payments and be refunded money you may have already paid, which can take several weeks. With credit cards, you can alert the credit card company and stop the payment if it hasn’t already been credited.

“Buy now, pay later loans fall into a legal gray area that leaves consumers vulnerable to getting tripped up by unfair practices without the protections they get with other forms of credit,” said Chien. “The CFPB should establish new rules for this largely unregulated market so consumers are treated fairly and aren’t surprised by interest charges and other unexpected costs when they take out a buy now, pay later loan.”

What Consumers Should Do: CR is advising consumers to pay for purchases in full whenever possible, to shop around to compare options if you have to finance a purchase over time, and to read the fine print so you are aware of potential risks. Here are some things consumers should keep in mind:

  • If you can’t afford a small purchase or don’t have a credit card, consider a traditional pay-in-four loan if you are certain you can repay it in six weeks, but be sure to set up autopay to avoid missing a payment.
  • If you can’t pay all at once for a large purchase, charge the item on your credit card and pay the balance off as quickly as possible. You may earn reward points and will have consumer protections that aren’t provided by BNPL loans.
  • If you need to make a larger purchase but don’t have a credit card, talk to your bank or credit union. Many offer small- or medium-sized personal loans with reasonable terms – three year loans at both lenders currently average about ten percent interest, according to the National Credit Union Administration..
  • If you need another way to finance a purchase, you could consider a monthly loan from a BNPL company, particularly if you can get a low promotional rate. To keep the costs as low as possible, make on-time payments to avoid late fees.

What policymakers should do: CR is urging the CFPB to adopt new rules for all BNPL loans to better protect consumers, including :

  • Enhanced disclosure and transparency: Require BNPL providers to make clearer distinctions between interest-free and interest-bearing loans and develop a standardized format for disclosing product features and pricing for pay-in-four BNPL loans.
  • Ability to repay: Require BNPL providers to assess a consumer’s ability to repay and put in place other responsible lending measures.
  • Credit reporting: Require BNPL providers to report customers’ payment history to credit bureaus and develop an appropriate approach for how to treat BNPL data.
  • Data privacy: Establish strong data privacy measures, particularly on the collection, use, and sharing of customer data.
  • Chargeback rights: Extend chargeback rights to ensure BNPL users have clear rights to dispute transactions as they currently do with credit cards.

Michael McCauley, michael.mccauley@consumer.org