After scams and privacy issues, ConsumerAffairs probably wrote about Buy Now Pay Later (BNPL) more than anything else last year. Prompting our coverage was the Consumer Financial Protection Bureau’s (CFPB) ongoing concerns about a borrower’s attraction to the bright, shiny, and new financing option and the parade of states that are sounding their own alarm.
The CFPB was at it again last week when it issued a report on its analysis of who’s signing up for BNPL. The conclusion? People who use BNPL probably shouldn’t be taking on any more debt than they already have.
The report called them “consumers in distress” and said those borrowers were “more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products and use high-interest financial services such as payday, pawn, and overdraft compared to non-BNPL borrowers.”
What a BNPL expert wants consumers to know
ConsumerAffairs asked Howard Dvorkin, CPA and chairman of Debt.com, for the ugly truth anyone considering BNPL needs to know.
“All BNPL providers are not the same. They offer very different terms, and you need to closely review the agreement,” Dvorkin said, noting that like credit cards, BNPL arrangements have varying terms on payback, interest rates, and fees. “This definitely isn't like paper towels, where both Bounty and Brawny will wipe up a spill.”
Those "terms and conditions" can be loaded with gotchas -- boring minutiae that may be glossed over by someone who bought into a social media influencer's pitch about a BNPL product. One big gotcha is the interest rate -- as much as 36% interest, almost double the average -- that kicks in if someone is late on a payment.
These concerns have snowballed into a mountain of complaints for the CFPB. According to its database, the number of BNPL-related complaints doubled in the last year.
Issues vary greatly, ranging from discrimination brought about by one company's automated "soft credit check" system, to attempts to collect debt not owed, problems when making payments, and 197 complaints about identity theft.
Heads, you lose – tails and no one cares
Part of Dvorkin’s truth serum is if you don’t pay off the BNPL balance in full, you’ll face a financial nightmare down the road.
“Even if you just miss a payment, the Big Three credit bureaus – Equifax, Experian, and TransUnion – will hear about it,” he said, bluntly adding that those missteps get added to your credit report, dragging down your credit score.
“While that also happens with credit cards, at least you can build credit by making timely payments. Not so with BNPLs. If you make all the payments on time, that doesn't go on your credit score. It's quite literally, ‘Heads you lose, tails no one cares.’"
A gateway to impulse purchases and overspending?
BNPL doesn’t exactly qualify as a drug, but it can be a gateway to someone spending more than they have the ability to pay for, suggests Jana Lynch, who heads ConsumerAffairs' research team and oversees our guide on Buy Now, Pay Later.
“Short-term installment loans like buy now, pay later apps seem quick and easy to finance a purchase, particularly if you can afford the payments and meet the terms," Lynch said. "However, there’s enormous potential to overspend, the deferred interest can add up and you can do some serious damage to your credit if you miss a payment.”