Buy Now, Pay Later – Danger Alert

Consumer Protection Credits

Mexico City     Dealing with all of the different predatory pitfalls involving delayed payment or credit alternatives is a financial whack-a-mole.  One day, you win some restrictions or limits on payday lending, and something else pops up and you have to corral installment loans.  Try to win limits on these usurious interest rates and suddenly you pinch yourself when you find yourself celebrating lowering a rate on some products to the mid-30% range.  Consumers are the marks to be exploited here, and membership organizations, like ACORN, are a thin line of protection offering alerts and guidance, even though it’s not our primary job.  Luckily, this is the fulltime job for many at government agencies, like the US Consumer Finance Protection Bureau, but simply saying it’s their job isn’t the same as saying it’s fixed.

One of the latest danger alerts everyone should carefully heed has to do with the growing use of “buy now, pay later” products, which are basically installment loans with fixed monthly payments carrying interest rates that can hit 36%.  Afterpay, Affirm, and Klarna are among the burgeoning companies in this exploding market in the United States, Canada, Australia, New Zealand, the United Kingdom, and other countries.  Reports indicate that their use accounted for 7.2% of US online sales during Black Friday and Cyber Week, a 25% jump in a year, as well as account for a decline in store credit cards.

Why are they becoming popular, and why should we worry?  Good question.  One attraction for some people is that most of these companies don’t report transactions and payment histories to the big US credit bureaus.  For some who are trying to qualify for a home or car loan, being able to keep traditional credit card payments under control by transferring some expenses from soup to nuts over to these products allows these folks to believe they have outfoxed the system, even though they are paying 36% rather than 21% or so, which is about the current average interest rate on credit cards.   For others who for various reasons may not be able to access or qualify for credit cards, these companies may be able to temporarily bridge the gap between money and the month, especially now that pandemic savings and support is its own version for lots of low-and-moderate income families of the “good times” memories for their bank accounts.  Affirm says it reports big five-figure transactions to the credit bureaus, but Afterpay and the Sweden-based Klarna do not.

Consumer organizations and advocates are crying for regulation of these companies and this product.  The CFPB says it will do so in the US and regulate them like credit cards, but that was last year, and it hasn’t happened yet.  Inaction has intensified the risks, since these folks don’t have to make good on fraudulent transactions or other scams.  They also can promote expenditures like there is no tomorrow, regardless of ability to pay.

This is a mole that needs to be whacked, and I don’t mean maybe, and it should be done yesterday.