The thing about buy now, pay later is that the later part always comes. Sometimes, the pay ends up being more than you think you’re signing up for, and often for stuff you shouldn’t have bought in the first place.
The buy now, pay later — or BNPL — trend has been on the rise for years, driven by companies such as Afterpay, Klarna, and Affirm. In March, Apple launched its own BNPL service, Apple Pay Later, in the United States. Practically every time you go to buy something online lately, there’s an offer to pay in installments. It seems simple enough on its face: You make a purchase, and instead of paying for the whole thing upfront, it’s split up into four interest-free payments, usually every two weeks. TikTokers pitch it as a savvy way to buy on a budget, an option for getting the things you want and need even if you don’t quite have enough to foot the entire bill right now. Plus, hey, you’re not dealing with the evil credit card companies.
If this all sounds a little bit too good to be true, it’s because it is. That overpriced dress you just bought is still overpriced, but the smaller payments make you feel more compelled to splurge on it. You are still walking around in pants that aren’t technically paid off.
“It is marketed as interest-free, but consumers can find that they end up being charged more than they think they will,” said Nadine Chabrier, senior policy and litigation counsel at the Center for Responsible Lending. “Should they lose track of their payments or have multiple buy now, pay later purchases, they can get return payment fees, missed payment fees, account reactivation, rescheduling, all kinds of hidden fees that they weren’t aware of at the outset.”
BNPL companies often don’t do in-depth checks of consumers’ credit, meaning people wind up getting into debt they can’t pay. If someone screws up, they can be hit with late fees and see their credit scores dinged. And screwing up is easy to do if people are taking out multiple loans or just aren’t accustomed to paying on a bimonthly basis, unlike other bills. If a consumer buys something on BNPL and the product isn’t what it’s cracked up to be, there’s a mistake, or they need to return it, getting their money back can be more complicated than with other forms of payment. The opportunity to pay in installments encourages consumers to buy more than they would otherwise.
At the moment, many BNPL companies exist in a sort of regulatory gray area and skirt laws that apply to more traditional lenders. There’s a push among consumer advocates and in states such as California and Massachusetts to increase scrutiny on BNPL companies and get them in line, and the Consumer Financial Protection Bureau, or CFPB, is looking into them, too.
In September 2022, the CFPB issued a report identifying “several areas of risk of consumer harm” in the BNPL space, including inconsistent consumer protections, data harvesting and monetization, and debt accumulation and overextension. “Buy Now, Pay Later is engineered to encourage consumers to purchase more and borrow more,” the report read. The Bureau said it would issue guidance or rules for BNPL companies to establish basic protections like those consumers get for credit cards. It said it would put in place supervisory examinations of companies in the space as well. The FTC has also put out a reminder to BNPL companies that consumer protection rules under its jurisdiction apply. It’s just one industry hoping to sneak in a win at regulatory whack-a-mole.
“You always have these new companies that say, ‘We’re different, we’re new, we’re quick, and the regulators don’t know how to regulate us because we’re so new and fast and techy or whatever,’” said Chi Chi Wu, staff attorney at the National Consumer Law Center. “And you know what? No.”
The cost of putting off paying
Buy now, pay later companies make much of their money through merchant fees, meaning they take certain cuts of purchases — say, 2 to 8 percent. That’s more than credit cards take, but as Chabrier explained, merchants are willing to pay up because the ability to pay in installments increases cart sizes. “They do, in fact, induce people to buy more than they normally would because they’re splitting it up,” she said.
You might pause more at spending $100 on the spot than you would at spending $200 split up into four $50 payments.
These companies can also wind up making money when consumers who use them make mistakes, Chabrier noted. “If you have, as many people do, five buy now pay later purchases and you make one false move, then you’re going to get hit with these unexpected fees,” she said, such as late fees if you miss a payment, “and maybe an overdraft fee from your bank.”
Those false moves are common. One April 2022 survey from LendingTree found that 42 percent of Americans who have taken out a BNPL loan have made at least one late payment on it. According to the Wall Street Journal, BNPL companies are seeing an increase in bad debt and late payments.
Consumers who use BNPL services tend to be younger, and many are people of color. Some also have subprime credit, meaning they might struggle with accessing traditional forms of credit. BNPL businesses say they’re offering financial inclusion, that they’re extending credit to people who can’t get it elsewhere. That may be true in many cases, but the line between predatory and progressive is blurry. One study from TransUnion found that BNPL customers have more credit products, such as credit cards, retail cards, and installment loans, than the general “credit active” population. Lenders in the space often have no idea whether the consumers they’re working with actually have the ability to pay.
“With buy now, pay later, you’re not taking into account the other financial obligations consumers may have,” said Elyse Hicks, consumer policy counsel at Americans for Financial Reform. You don’t have to look far on the internet to find stories of millennials and Gen Z over their heads in debt because of BNPL, and with inflation and the current precarious state of the economy, the situation could become worse.
We still don’t really know how to deal with credit, or regulate it
How to approach credit — who should get it, how much should be charged for it, what happens for people who are left out — is a difficult issue. We want people to be able to buy things, and credit is a central force of the economy. Millions of people in the country don’t have access to banks and get shut out by the more conventional credit system. We also don’t want people to get hurt because of debts they can’t get out of, or taken advantage of by lenders because they don’t understand the terms.
Consumer advocates don’t necessarily argue that BNPL shouldn’t exist, but they say it needs more scrutiny and regulatory oversight, and that people should be given a better idea of what they’re getting into. Consumer protection laws, such as the Truth in Lending Act, which protects consumers against inaccurate and unfair credit practices, aren’t yet being applied to BNPL. (There’s a reason BNPL companies do four payments — the 1968 law kicks in on consumer loans once they’re split into five.)
The “jury’s still out” on exactly what BNPL implies for consumers, said Robert Lawless, a law professor at the University of Illinois who specializes in consumer finance. He gave the example of payday lenders and buy here, pay here car lots, both of which at first glance appear to offer useful solutions for people with poor or invisible credit. “But we know the facts, that as applied, those are very abusive industries,” he said. Over the years, there have been many consumer finance innovations that have claimed to be in consumers’ interests. “I think we still don’t have enough experience to know where buy now, pay later is going to go.”
He pointed out that the problem of businesses trying to skirt laws concerning credit and debt is hardly new. In the 20th century, lenders and stores tried to get around usury laws that dictate interest rates by claiming they weren’t charging interest but were instead basing prices on a “time-price differential,” Lawless said, meaning charging one price if a product is paid for upfront and another if it’s paid for in installments over time. “If that sounds like bullshit, it’s because it is. It’s just interest by another name.”
There are countless examples of tactics and products that try to get around financial regulations and rules. There are so-called rent-a-bank agreements, where high-cost lenders try to get around state interest rate caps, and earned wage access products — basically, payday advances — that companies argue don’t technically fall under the Truth in Lending Act because they don’t have fees (instead, for example, some of those companies ask for tips). “It is all along this continuum of novel products and lack of regulation that needs to be addressed,” Chabrier said.
Much of the time regulators catch up and these issues do get taken care of — but it takes time. In the meantime, on offers such as buy now, pay later, many consumers wind up losing their (only partially paid-off) shirts.
“What happens when you convince a generation to spend more than it can afford?” Scott Galloway, an NYU marketing professor and co-host of the podcast Pivot, recently asked in New York magazine. We may be about to find out.
As Bloomberg recently outlined, between the threat of regulation, economic uncertainty, and consumers floundering under debt, many companies in the space are already in trouble, and their values are plummeting.
BNPL companies may now be in a pickle, the way that so many of their customers already are.
We live in a world that’s constantly trying to sucker us and trick us, where we’re always surrounded by scams big and small. It can feel impossible to navigate. Every two weeks, join Emily Stewart to look at all the little ways our economic systems control and manipulate the average person. Welcome to The Big Squeeze.
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Update, March 29, 11:50 am: This story was originally published in August 2022 and has been updated with the launch of Apple’s buy now, pay later service, the CFPB’s September 2022 report on BNPL, and the FTC’s activity on the matter.