3 things to know before using credit offers Buy now, pay later: CFPB
- A CFPB survey found that “buy now, pay later” programs can save consumers more money than credit cards.
- This assumes that consumers are not behind in their payments or accumulating loans when they cannot pay a bill.
- The CFPB says BNPL products must offer the same protections as major credit cards.
“Buy now, pay later” purchases have grown in popularity during the pandemic. And it looks like it could have long-term benefits for shoppers, the Consumer Financial Protection Bureau said in a report this week.
The government watchdog has stressed that it wants to implement more safeguards for layaway-type products, which are typically installment loans that allow customers to split purchases into multiple equal payments. Affirm, Afterpay, Klarna and PayPal’s “Pay 4” option are some of the most popular and are increasingly used among Generation Z buyers above all.
The CFPB has ultimately found that these products can be cheaper than credit cards and easier to use, essentially delivering consumers what they promise. If you use an interest-free one and pay off your loan installments on time, you don’t pay extra for a purchase. And you didn’t have to go through a credit card company to get it.
The CFPB said it was seeking to create “advisory opinions” and codify regulations that would bring more credit card-like protections to BNPL services. Common regulations for credit cards include fraud protectionfor example, available to major credit card users and secured by federal law.
“We will work to ensure that borrowers have similar protections 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 traditional credit products,” the report says.
And “the nature of the product structure and underwriting strategy” could reduce “cycles of overspending and indebtedness,” the CFPB said.
After the publication of the report, BNPL shares slipped slightly.
The CFPB report indicates that BNPL loans in the United States increased by 970% between 2019 and 2021. This represents 180 million transactions between the five major lenders, with the value of these loans also jumping by 1,092%, at $24.2 billion.
Here are three facts about CFPB’s BNPL products that you should know before using one:
BNPL is more accessible and has lower financial costs than traditional credit cards
The BNPL report lists some caveats about data sharing, but it’s mostly positive for the BNPL, which the CFPB says will become a growing force in consumers’ lives. The report notes that loan approval rates are increasing, with 73% of applicants approved for credit in 2021, up from 69% in 2020.
There are several “competitive advantages” to using a BNPL loan rather than a credit card loan, according to the report: there is no interest on a BNPL loan and sometimes no late fees, they are ubiquitous, easy to access and have a very simple approach. reimbursement structure, found the CFPB.
Consumers should beware of ‘loan stacking’, late fees and other risks
BNPL products are cheap and easy to use, which could make their risk factors less obvious, the CFPB said.
‘Loan stacking’ is a danger – it’s when a consumer has multiple loans outstanding across multiple BNPL providers, which could lead to ‘debt traps’ from unethical lenders, said the CFPB. This is when unethical lenders seek out debtors who they know have an existing debt that they need to repay.
The report also notes that BNPL borrowers face some issues when it comes to returning products, and that the “automatic payment” feature on BNPL loans exposes borrowers to overdraft fees.
Additionally, they said, privacy and data sharing are concerns; BNPL companies use consumer data for advertising, for example, and monetize the data they collect.
CFPB wants to implement buyer protections similar to credit cards
Chopra pointed out that as they become more widely used, the CFPB wants BNPL loans to offer the same protections as major credit cards.
“Borrowers seeking Buy Now, Pay Later credit may encounter products that do not offer standard protections elsewhere in the consumer financial marketplace,” the CFPB said in its statement. “These include a lack of standardized cost of credit disclosures, minimal rights to dispute resolution, forced opt-in for automatic payment, and companies that assess multiple late fees on the same missed payment.”