Millions of Americans have adopted the practice of buying items at low cost and paying for them in installments, a model increasingly popular among retailers known as “loans. But many consumers struggle with the “pay later” part of the equation.
While these loans can help consumers purchase goods they would otherwise struggle to afford, they are largely unregulated and can lead to problems down the road. To prevent people from getting burned, the federal Consumer Financial Protection Bureau plans to develop rules for buy now, pay later lenders.
“Buy now, pay later is a rapidly growing type of loan that is closely replacing credit cards,” CFPB Director Rohit Chopra said in a statement Thursday. “We will work to ensure borrowers have similar protections whether they are using a credit card or a buy now, pay later loan.”
Buy now, pay later loans have grown in popularity alongside the rate of inflation in the United States, with some borrowers using them to purchase basic necessities such as groceries, gasoline and pet care products. company. Loans are generally interest-free and range from $50 to $1,000 and are repaid in four installments. Yet, although the loans are interest-free, they are subject to late fees if a borrower misses a payment.
In 2021, buy-now-pay-later loans totaled $24 billion, up from $2 billion in 2019, according to a CFPB report. The payment option has become ubiquitous in stores and online, forcing regulators to catch up. At the same time, the agency has seen a steady increase in the percentage of borrowers falling behind.
“To be quite frank, regulation hasn’t kept up with fintech,” Associated Press reporter Ken Sweet told CBS News.
While the loans are often marketed as a “zero risk” credit option, regulators note that the loans don’t have the same protections as traditional credit products. Borrowers could also be forced to make automatic payments or be subject to multiple late fees if they miss a single payment.
According to the CFPB, providers of buy-now, pay-later loans, such as Affirm, Afterpay and Klarna, could also collect and sell consumer data, potentially threatening consumer privacy.
“[W]We find that companies that buy now, pay later are building business models dependent on digital surveillance. In some ways, these companies aren’t just lenders, they’re also advertisers and operators of virtual malls,” Chopra said. “Because they are deeply integrated as a payment mechanism for e-commerce, buy now, pay later, lenders can collect extremely detailed information. information about your buying behavior, unlike traditional cards.”
Another major concern for regulators: buy now, pay later. The loans are designed to encourage consumers to spend – and borrow – more. Meanwhile, lenders don’t provide data to major credit reporting agencies, making it easy for consumers to take out loans they can’t afford to repay and rack up debt.
In other words, buying now and paying later can fuel unhealthy financial habits that seriously threaten consumers’ financial well-being.
The CFPB said it was working on rules that would subject lenders buy now, pay later to the same type of oversight as credit card companies. It also examines the extent of data collection from lenders and works to develop credit reporting practices that reduce the risk of borrowers accumulating too much debt.