There’s a long history of paying in installments: there’s the way old ads advertise, there’s rental-to-own products, or buyers can put their purchases on a layaway payment.
But recently, more and more options have emerged that give consumers the items immediately and eliminate the threat of repossession.
Companies like Afterpay, Klarna, and Affirm have become a more frequent resource for people looking to buy things using an extended payment plan. They are increasingly appearing as payment options on the websites of major retailers, including Target, Bed Bath & Beyond and Amazon.
It’s a huge undertaking. A report from the California Department of Financial Protection and Innovation found that 91% of consumer loans taken out in the state in 2020 came from buy now, pay later lenders.
But unlike renting a car or getting a new credit card, there isn’t much regulation in this space due to its newness. Buyers get the instant gratification of getting their purchase right away, which doesn’t necessarily affect their credit score.
“A significant portion of people are making multiple purchases now and paying purchases later,” said Nadine Chabrier, litigation policy adviser at the Center for Responsible Lending. “There is no consideration of repayment capacity, and there is no specific date when a person can expect their last payment to come out of their account later. So people tend to make several purchases and to be overwhelmed.”
Chabrier fears the short-term nature of these loans has helped buy now, pay later suppliers to avoid existing rules.
“Some of the things we’ve advocated for is to regulate buy now, pay later like a credit card,” Chabrier said. “There are really important consumer protections that you have under credit cards that you don’t have when you buy now, pay later.”
These types of services often have a younger and more diverse user base. A Morning Consult poll conducted earlier this year found that Gen Z and Black and Hispanic Americans were more likely to use a buy now, pay later service than the average American.
Elyse Hicks of consumer advocacy group Americans for Financial Reform says this fits with other trends in economic inequality.
“Basically, BIPOC communities have less of them, so they’re more likely to use products like Buy Now, Pay Later, Klarna, in order to get the things they need or want, because that puts those bites or bites – size slices, something they feel like they can handle, in front of them,” Hicks said.
The same Morning Consult survey found that one in five borrowers using buy now, pay later missed a payment in January, the month they took the survey.
This can lead to significant costs for consumers.
In August, after President Biden announced his intention to forgive Americans with student loan debt $10,000 or more, a Twitter user’s question about whether President Biden would also forgive AfterPay debts went viral. .
For now, consumers like Grace Oppy, who is a currently indebted Afterpay user, and the millions of others who use these services are at the mercy of the companies. Affirm, for example, informs consumers that it has no late fees, but it notes that it would charge up to 36% APR based on your credit, which is higher even than the Highest APR on most credit cards.
But in the moment, seemingly good offers can be very tempting.
“It started with a lot of strategy,” Oppy said. “I was like, ‘If I just do this, then I’ll be glamorous and perfect. I’ll definitely get my promotion.’ And now…I have $90 earrings. So really, it’s a slippery slope in my mind. My dopamine receptors are just, boom, flying when I use them.”
Advocates Newsy spoke to said the dopamine hit Oppy feels — a rush of satisfaction — is exactly what makes it so tempting to use these services while shopping.
“It just feeds into millennials and Gen Z, how we like to get things very instantaneously,” Hicks said. “We all know that we want something, that we can get it at a discount and get it to our door very quickly. It hits that dopamine, and we’re on to something else. So it kind of puts you in a cycle, and a bit like a debt trap too.”
Social media influencers are offering buy now, pay later as a life hack for those who want something and don’t want to worry about the cost today.
“You have people that you look up to, who look like they’re having a great life, who then have that piece of clothing or that product, and it’s just an aspiration,” Chabrier said. “It’s understandable that people yearn for a particular lifestyle or feeling, and that’s what I think this type of marketing plays on.”
Nor is it lost on consumers.
“They make it look so frivolous…like a fun app,” Oppy said. “They’re associating with influencers. It’s really harmful, and it’s subtle. But, to make these people that we’re all trying to base our advertising lives on this pretty predatory lending practice that’s not regulated: sneaky. And they got me. They got me there.”
But regulations and standards may be coming soon. Many buy now, pay later loans go unreported, which means that while there’s no guarantee your credit score will suffer if you miss payments, you also might not be building credit that can help you get other loans or credit cards in the future.
Equifax, Experian and TransUnion – the three largest credit bureaus – this year announced plans to incorporate buy now, pay later loans into their records, but the implementation of this is yet to be determined.
Meanwhile, state and federal regulators are considering how to account for “buy now, pay later” services.
A group of 21 state attorneys general wrote a letter calling on federal officials to set standards on the matter. Over the holiday season last year, the Consumer Financial Protection Bureau announced that it had begun a review of the buy now, pay later industry, keeping tabs on federal regulations protecting consumers against debts and ensuring that companies inform consumers of the costs they may incur.
Proponents hope the rules will ease the burden on consumers and force the companies themselves to provide more information up front. But until then, they say make sure to read the fine print.
“Please look at all of your products or apps,” Hicks said. “See how much you currently owe on those purchases, pay the businesses later, and just be mindful of your spending habits. It’s so easy to get out of control with this, but be mindful until regulations roll in.”
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