The use of “buy now, pay later” credit exploded during the holiday season in the United States. But some who have taken advantage of these kinds of very easy-to-use services may now find it difficult to make payments or manage returns.
Here’s what you need to know, if you find yourself in a difficult situation.
These services, also known as “four-part payment” because borrowers often repay the loan in four installments over several weeks, are offered by companies like Afterpay, Affirm, Klarna, PayPal and Zip. More than a quarter of Americans have used this option to pay for items such as clothing or electronics and appliances, the magazine found. Consumer Reports in a survey conducted last summer, up from 18% earlier in the year.
These services, which are lightly regulated, have been very successful because consumers can quickly obtain a loan at the point of sale, after a cursory credit check. People who cannot get a traditional credit card may therefore qualify. Borrowers generally pay no interest or fees if they repay on time.
And unlike old layaway plans, where customers paid the full amount before receiving an item, customers who pay later receive their merchandise immediately. According to Consumer Reportsmost people who have used these services say they are satisfied.
Yet regulators and consumer advocates are increasingly concerned about the lack of effective protections for customers and the fact that borrowers risk being overwhelmed by events.
Some Americans, hard hit by inflation, use these services to pay for groceries and other necessities. Borrowers may struggle to manage multiple loans, depending Consumer Reportsand more than a quarter of people who used a deferred repayment loan said they encountered at least one problem, such as being overcharged or having trouble getting repayments.
Late or missed payments can result in additional charges of about US$7 per payment on an average loan of US$135, the Consumer Financial Protection Bureau said in a recent report. And since most services automatically charge your debit card for payments, your bank may charge you an overdraft fee if your balance is too low when the payment is withdrawn.
“The cons outweigh the pros,” said Ed Mierzwinski, senior director of the federal consumer program at US PIRG, a consumer advocacy group.
Penny Lee, CEO of the Financial Technology Association, a lobby group representing fintech companies including several deferred payment service providers, defended the services in an email, saying they provide flexibility for customers can integrate their purchases into their budget cycles.
“Using a ‘buy now, pay later’ product is seamless, she added, as consumers see the exact amount of their payments, the payment schedule and any charges they might incur. charge if they miss a payment, with some companies not charging late fees at all. (Affirm and PayPal are among the lenders that don’t charge late fees.)
The Consumer Financial Protection Bureau, however, has warned consumers about the risks of loan “double-dipping”, that is, taking out several loans at the same time. “Because it is possible to make multiple ‘buy now, pay later’ purchases in a short period of time through different services or merchants, it is easy to end up with more debt than expected or possible. afford,” the organization said.
This can put some borrowers in difficulty. In 2021, 3.8% of borrowers surveyed by the Consumer Financial Protection Bureau in a study of five deferred payment service providers had a loan that was “charged” as a bad debt, compared to 2. 9% in 2020, and the upward trend continued in the first half of 2022.
This has led consumer advocates to call for term loans to be regulated in the same way as traditional credit cards, with standard disclosures and protections, such as the right to temporarily withhold payment while a disputed charge is studied. “That doesn’t exist with ‘buy now, pay later’ loans,” said Rachel Gittleman, chief financial services officer for the Consumer Federation of America.
The Consumer Financial Protection Bureau has been studying the industry and will consider taking steps to ensure deferred repayment loans are “fair, transparent and competitive,” the agency’s director, Rohit Chopra, said recently.
The way major credit bureaus treat deferred repayment loans is a major concern. “These are not credit-building products,” Mr. Gittleman said. That could change, but most companies don’t regularly report term payments to major credit reporting agencies — Experian, Equifax, and TransUnion. And when they do, agencies don’t use all the data equally, often not including it in traditional credit reports.
But deferred repayment loans can hurt your credit if you don’t pay. Lenders can send the account to a collection agency, which can show up on your credit report and hurt your credit rating.
Last summer, the Consumer Financial Protection Bureau reported “inconsistent” treatment of deferred repayment loans by credit reporting agencies and recommended a standardized approach.
Here are some questions and answers about term loans:
How can I protect myself when using an installment loan?
Limit yourself to one or two loans at a time. Consumer Reports found that people who owed four or more loans at a time were twice as likely to miss a payment as those who had fewer loans. Payments are generally due every two weeks. Chuck Bell, Director of Advocacy Programs at Consumer Reportsrecommends, if you have several loans, to note the dates in a notebook or to create a spreadsheet.
Some pay-later lenders require automatic payments from your debit card or bank account. To avoid late fees, check your account on the first due date, he says, to make sure the autopay feature is working and funds are available. (Sometimes cards expire, he says, or users enter account numbers incorrectly.)
Avoid paying off the loan with a credit card, he says. You risk paying interest on the purchase if you have a balance on your card.
What if I can’t make an installment payment?
If you’re worried about missing a payment, you should definitely contact your lender, Gittleman said. You may be able to defer a payment, especially the first one. Some lenders, however, may limit the number of times you can defer a payment. You should be able to find details in the lender’s ‘terms and conditions’ on their website or in their ‘frequently asked questions’.
What if I have a problem with a refund?
Most deferred payment services refer customers to the merchant first to handle returns. If a merchant refuses to accept a return, the customer then contacts the lender – often online – to file a dispute. Policies vary from lender to lender, according to the Consumer Financial Protection Bureau. Some lenders temporarily suspend payments, while others may require the installment loan to be paid as agreed, until the investigation is concluded. You will find the return policies on the lenders’ websites.
This article was originally published in the New York Times.