A stern warning is being sent to consumers that there are all sorts of pitfalls to deal with when it comes to buy now, pay later (BNPL) – maybe more than the typical consumer is used to seeing from other finance methods like credit cards or personal loans.
“Realize that BNPL plans don’t offer the federal protections that come with purchases you make by credit card. If an item purchased with BNPL is faulty, lost or stolen, that does not mean you will have protection against having to repay the BNPL loan,” said Hannah Rhodes and Teresa Murray, U.S. PIRG’s Consumer Watchdog team, in their pitfall protection bulletin.
“The federal government offers that safeguard for credit card users.”
Hidden fees, interest, and debt collection
Rhodes and Murray said the complaints are mounting against BNPL companies – and it’s not just one thing, either. Hidden fees, interest, and debt collection, and customer service are all factors that are angering BNPL users.
Surveys also show that a successful BNPL demographic target is young people, who may not understand the business model. In addition, increasing the size of the “basket” leads to consumers buying more stuff that they don’t need and can’t afford.
Know what you’re signing up for
Rhodes and Murray say that with higher inflation and tighter budgets for many this holiday season, it's likely that more consumers will consider Buy Now, Pay Later offers, many without fully understanding them.
BNPL works like this:
You make a purchase and agree to pay off the bill in four installments over six weeks.
You make the first payment at checkout using a debit or credit card.
The remaining three payments will come every two weeks, whether you have the money in your checking account or available on your credit card or not. If it’s “or not,” be prepared for possible overdraft or over limit fees of $30 or more.
Best case and worst case scenarios
The best case scenario is paying it off on time with no fees and no need to return the item. Worst case scenario? Hmm... Actually, we should make that plural because there’s more than one thing that could go wrong.
“Shoppers run into problems when there are terms and conditions they didn't read or understand, or when they make several purchases using BNPL and haven't budgeted to juggle all of the payments that are lined up like planes on an airport runway,” the watchdogs said.
“Then there are the consumer protections you're forgoing by not paying with a credit card to begin with. And you need to hope the item isn't defective or that the recipient of the gift doesn't want to return or exchange it. You may not be able to get a refund or an exchange, no matter the reason.”
The downsides to BNPL can quickly snowball and haunt a consumer for a long time, Trey Loughran, CEO at Purchasing Power, a company that offers credit using a payroll deduction component, told ConsumerAffairs.
"Failing to make an agreed-upon payment for a Buy Now Pay Later can have compounding effects – requiring the consumer to pay late fees and potentially impacting someone’s credit score," he said.
"At the end of the day, Buy Now Pay Later solutions are another form of credit and consumers need to be conscious not to overextend themselves."