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Using Buy Now Pay Later and how it affects your finances

Digital Banking and Payments Revolutionizing Financial Services

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Credit Sesame discusses using Buy Now Pay Later, the pros and cons and how BNPL can affect your finances.

As inflation ravages consumer budgets and thwarts retailers’ marketing efforts, Buy Now Pay Later (BNPL) schemes have become ubiquitous, especially online. While this popular payment option has tremendous value for retailers, it can be problematic for consumers, especially the most vulnerable.

How does BNPL work?

Retailers offer BNPL at checkout, mainly to online customers. Consumers can opt to pay for their purchases over time, usually interest-free, by making several installments.

While retailers offer the service, they don’t provide it. That’s done by BNPL lenders, which charge merchants steep fees (4%-9%, averaging about 6%). So BNPL is really a personal loan supplied by a lender to the merchant’s customer. Most providers offer loan amounts of $50 to $1,000.

With a BNPL, the customer makes a down payment–often 25% of the purchase price–and pays off the balance over time in equal installments. Typical plans require four installments due either monthly or every two weeks.

BNPL lenders generally perform a “soft pull” of the buyer’s credit, and some don’t check credit at all. It’s much easier and quicker to be approved for a BNPL arrangement than for a credit card. According to the CFPB, about 75% of applicants are approved for BNPL purchases.

Usually, consumers pay no interest or fees as long as they make their BNPL payments on time. If they pay late, however, they can incur interest charges (rates up to 30%) and/or late fees. BNPL loans are much less-regulated than credit cards.

BNPL lenders don’t often report the loans to credit bureaus, mainly because the industry doesn’t feel credit bureaus are equipped to treat BNPL loans in a way that helps rather than harms customer credit scores.

Why retailers love BNPL

It costs merchants about twice as much to offer BNPL than it does to accept credit card payments, so why do they do this? Consumers at checkout have already decided to buy the item, so why would a seller increase its fees after making the sale?

Because they have not yet in fact made the sale. Fully 70% of online customers exit their purchase at checkout (and mobile users pull out of 85% of purchases!). Retailers call this costly behavior “cart abandonment” and, understandably, devote a great deal of effort toward reducing those numbers.

For retailers, offering BNPL has tremendous advantages:

  • 20% more website visits convert to sales
  • The average order increases by 87%
  • Promotion of their businesses by BNPL lenders

Some retailers have reported 40% higher sales after adding BNPL to their stores.

Most common reason for using Buy Now Pay Later

What types of purchases does BNPL facilitate most? Necessities? Impulse buys?

According to finmasters, consumers who use BNPL reported purchasing the following items:

  • Clothing (50%)
  • Electronics (33%)
  • Shoes (29%)
  • Home decor (25%)
  • Accessories (22%)
  • Beauty products (21%)
  • Jewelry (19%)
  • Sports equipment (9%)
  • Toys (9%)
  • Travel (9%)
  • Books (8%)
  • Event tickets (7%)
  • Other (7%)

Most people would probably classify the majority of these items as “wants” rather than “needs.”

But the story changed in 2023. In January and February, groceries’ share of BNPL orders spiked by 40%, while electronics fell by 14%. Mostly younger, poorer Americans became increasingly more likely to use BNPL for food and household necessities.

BNPL advantages for consumers

There are some good reasons for consumers to consider BNPL instead of credit cards or other alternatives.

Easier approval

Consumers who don’t qualify for credit cards have an easier time getting approved for such arrangements. About three-quarters of BNPL applications are approved, while those with fair credit have credit card approval rates of just 20% to 40%.

Cheaper financing

According to the CFPB, Buy Now Pay Later borrowers have lower credit scores than consumers who don’t use BNPL, 580-669 vs 670-739. Because people with lower credit scores pay higher interest rates, Buy Now Pay Later loans with no interest are an attractive alternative for these people.

Borrowers can make emergency grocery or household purchases without resorting to risky and expensive alternatives like payday loans or cash advances.

Hassle-free

BNPL applicants don’t hurt their credit by applying because lenders perform only a soft credit check or no credit check at all. And there is no long application and no waiting for a card to come in the mail. They can use it right away for their purchase.

Pitfalls of BNPL for consumers

The CFPB has expressed concern over BNPL accounts because Buy Now Pay Later products do not offer protections that are standard for other consumer financial products.

  • Lack of standardized cost-of-credit disclosures
  • Minimal dispute resolution rights
  • Forced opt-in to autopay
  • Companies that assess multiple late fees on the same missed payment

Consumers can easily become overextended, illustrated by the fact that 45% of respondents surveyed by The Motley Fool said they chose BNPL to “make a purchase outside of one’s budget.”

The CFPB raised this concern as well, saying, “Buy Now Pay Later is engineered to encourage consumers to purchase more and borrow more. As a result, borrowers can easily end up taking out several loans within a short time frame at multiple lenders or Buy Now Pay Later debts may have effects on other debts.”

Lenders may unknowingly exacerbate this problem and advance more credit than borrowers can afford or should have. “Because most Buy Now Pay Later lenders do not currently furnish data to the major credit reporting companies, both Buy Now Pay Later and other lenders are unaware of the borrower’s current liabilities when making a decision to originate new loans.”

In fact, Buy Now Pay Later borrowers are heavier users of other loan products than non-BNPL borrowers, including store cards (62% vs. 44%), personal loans (32% vs. 13%), and student loans (33% vs.17%).

There are other problems for consumers, especially low-income or inexperienced borrowers. BNPL customers, especially those with multiple loans, can have problems keeping track of their payment due dates. This results in finance charges or late fees. In fact, about 25% of BNPL borrowers end up behind on their payments.

Returns can be problematic with BNPL schemes because the loans don’t always go away when the product is returned. Hassles ensue. The biggest pitfall, however, is that BNPL encourages people to spend more and think less. One C + R Research study found that 57% of BNPL borrowers regretted using the service, mainly because they “spent more than they could afford to pay.”

The future of BNPL

The BNPL industry has enjoyed wild growth in recent years and is poised for more. One big reason is its popularity with young adults who tend to distrust credit cards and prefer something they view as more transparent. The industry is fairly young and many forces are in play.

  • BNPL lenders advance money at no cost but pay to borrow it. As interest rates rise, profits are being squeezed.
  • Economic downturns can make BNPL loans go very bad very fast. Losses have begun piling up and major players’ stocks have been downgraded.
  • Experts anticipate ramped-up regulation of the industry, which increases costs and could slow growth.
  • Credit reporting agencies are altering their products to incorporate BNPL into credit scoring models. If lenders start reporting (and it’s possible that they may be forced to, given the concerns of the CFPB), credit-challenged borrowers may use them to build credit in the future. If BNPL balances are reported, lenders have access to better information and are less likely to grant unaffordable loans.
  • Demand for BNPL in-store is high, while challenges with POS system integration have slowed adoption by retailers. The service will likely become more common as lenders and retailers work together to meet this challenge.

There is a best-case scenario for using Buy Now Pay Later. BNPL lenders will disclose more. Borrowers will understand their payments, interest rates and penalties before committing to a payment scheme. And with loans being reported to credit bureaus, traditional lenders will be less likely to grant excessive credit to those who can’t afford it. At its best, BNPL is a legitimate competitor to credit cards. At its worst, it’s a trap not unlike payday and title loans that prey on financially marginalized, vulnerable people.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Gina Freeman
Gina has been writing consumer-centric content in the personal finance, business and investing for nearly 20 years. She loves making challenging or even “boring” topics accessible and helping readers feel educated and confident in their decisions.

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