Buy Now, Pay Later (BNPL) plans are increasingly being offered as a convenient credit alternative that allows purchases to be made in installments, typically four payments over six weeks. The so-called “fintech” (financial technology) companies that offer these plans often advertise them as offering consumers interest-free payments without impacting credit scores.
But consumer groups and economic justice organizations point out that these financial products that already reach 8.42 million consumers may be just another explosive form of predatory lending that exploits unsuspecting consumers through a lack of transparency that usually leads to confusion about the true terms and consequences that come with the product. Without effective regulation, millions more consumers could be financially duped by the BNPL.
Consumers can use BNPL offers from companies such as Affirm, Klarna, PayPal Pay in 4 and Sizzle, as well as others at physical stores like Macy’s, Footlocker, Target and Walmart, and online retailers like Amazon.
BNPL purchases require direct debit or credit card charges. Since each BNPL purchase comes with its own set of payment due dates – unlike the fixed payment date of a credit card bill – these ongoing deductions can easily result in additional bank charges for consumers in case of insufficient funds and overdrafts. And many BNPL transactions do not automatically come with the product return and/or fraud protections offered by credit cards. Instead, these credit terms are currently at the discretion of BNPL’s suppliers. As a result, consumers may find themselves without merchandise, while their money is still taken from debit or credit card accounts.
Complaints filed with the Consumer Financial Protection Bureau (CFPB) and the Better Business Bureau noted several consumer issues, including lack of information about initiating disputes, delays in receiving refunds, and continued demand for refunds BNPL lenders.
Last November, Marisabel Torres, California policy director for the Center for Responsible Lending, told Congress that BNPL loans are generally designed to avoid coverage under the Truth in Lending Act (TILA).
“This law excludes from the definition of “creditor” anyone who grants a credit which does not require a financial charge and is repayable in four installments or less…. The fact that this is a “free credit” product begs the question: what is the problem? Torres said. “It turns out there are a number of captures – some demonstrable, some potential – that require regulatory attention and response.”
Proponents say many adverse effects could be avoided if BNPL lenders were required to verify a consumer’s ability to repay before the first loan was made. Instead, as with payday loans, each billing cycle tends to worsen, rather than improve, the borrower’s financial situation, dragging them deeper into the debt trap.
Just a month later, in December 2021, consumer and economic justice advocates applauded the CFPB when it announced it would open an investigation into the BNPL’s big lenders.
“By opening this investigation, the Office of Consumer Affairs is taking an important first step in understanding this industry and preventing harm to consumers,” said CRL’s Torres.
Without vigilant oversight and proper regulation, warn Torres and other advocates, products promising to promote financial inclusion could instead exacerbate financial exclusion.
Last March, a coalition of 77 organizations representing national consumer organizations and advocates from 16 states and the District of Columbia sent a letter urging the CFPB to treat BNPL as a form of credit and subject lenders offering the products to regulation under appropriate consumer financial protection laws. like TILA. This law requires responsible underwriting, disclosure of fees, and the ability to dispute billed items.
Without regulation, the growing use of BNPL could lead to further financial harm for consumers, especially those with the least financial resources.
Charlene Crowell is a senior researcher at the Center for Responsible Lending.