Although embraced by american consumers Buy now, pay later loans In part because of marketing claims that they offer zero percent financing, shoppers should be on their toes. Some BNPL products charge exorbitant interest rates, along with steep fees when you miss a payment, according to Consumer Reports.
Loans allow consumers to divide payments into smaller installments and spread them out over time, helping them make purchases that they may otherwise not be able to afford. But the nonprofit advocacy organization urges consumers to read the fine print, while the group is also calling on federal regulators to Embrace Stronger policy measures to mitigate consumer risks posed by evolving industry practices.
The most popular BNPL loans are “pay in four” products, according to Consumer Financial Protection Bureau. These short-term credit plans divide the total amount of the purchase, which usually ranges from $50 to $1,000, into four equal payments. Consumers pay the first 25% at the point of sale and the remaining three installments over the next six weeks – without interest or fees.
In March, Apple became the latest retailer to jump on the bandwagon with its launch Apple Pay later, a new service in its digital wallet that allows customers to split purchase payments into four installments over a period of six weeks. Just over half of Americans say they expect to apply for a BNPL loan at least once in the next six months, according to a recent study in Lending Tree. is found.
The rapid growth of the industry has also led to new business products By companies like Affirm, Klarna, PayPal, and Sezzle. But these larger loans can have longer terms and, unlike “pay-on-four” products, can carry interest rates of up to 36.99%, while shoppers can also find themselves hit with late fees of $30 or more for a single missed payment, according to Consumer Reports. Among consumers who took out a BNPL loan in 2021, 11% have a loan charged interestAccording to a survey by the Financial Health Network.
Higher interest rates make long-term buy now, pay later plans more affordable than the average credit card. Get a loan of $2,500 with a long-term BNPL loan and an annual rate of 36.99%. Over the course of 24 months, the borrower will end up paying $1,074 in interest charges, according to Consumer Reports. By comparison, a $2,500 purchase using a credit card with a 24% APR paid after two years would cost $672 in interest.
Unlike credit cards, meanwhile, buy now, pay later loans lack basic consumer protections. This is because despite the widespread use of these products, they are largely unregulated.
Despite increased scrutiny by the CFPB, which it has Shown That the upcoming regulations of the products, the only real protection for the consumer is to be aware of the financial risks. Besides the possibility of exposure to stringent interest charges, these include the risk of overspending and overburdening penalty feeAnd Revenue Challenges or disputed fees.
“Buy now, pay later loans fall into a legal gray area that leaves consumers vulnerable to default due to unfair practices without the protection they get from other forms of credit,” Jennifer Shin, senior policy advisor for financial justice at Consumer Reports, said in a statement. “The CFPB must set new rules for this highly unregulated market so that consumers are treated fairly and are not caught off guard by interest charges and other unexpected costs when they buy now, pay the loan later.”
In the meantime, here are seven tips from Consumer Reports on avoiding the potential pitfalls of a BNPL.
- Ask yourself if you really need to make a purchase. The convenience of BNPLs makes it easier to justify spending money. But 57% of BNPL users report buyer’s remorse because what they bought “was too expensive,” according to Bank.
- Pay for purchases in full whenever possible.
- Think before you leap. CR recommends shopping around to compare options—and again, read the nitty-gritty.
- If you can’t afford a small purchase and don’t have a credit cardConsider a traditional four-payer loan if you’re sure you can pay it back in six weeks. Make sure to set up automatic payment to avoid missing a payment.
- If you can’t pay at once for a large purchase, charge the item on your credit card and pay the balance ASAP. With a credit card, you’ll get consumer protections that BNPL loans don’t, and you may earn reward points.
- If you need to make a larger purchase but don’t have a credit cardTalk to your bank or credit union. Offers many smaller personal loans at reasonable terms.
- If you need another way to finance your purchaseConsider getting a monthly loan from a BNPL lender, especially if you can get a low promotional rate. To keep costs as low as possible, be sure to make payments on time to avoid late fees.
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