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Why is “Buy Now, Pay Later” regulation in the works? Who do these programs help and harm?
Buy Now, Pay Later (BNPL) services provide short-term financing that enables people to make large purchases they might otherwise not be able to afford. But critics argue that the services put financially vulnerable individuals at greater risk.
Continue reading to learn about BNPL programs and regulations.
Problems With “Buy Now, Pay Later”
“Buy Now, Pay Later” short-term financing services are often touted as game changers that help people afford big-ticket items they otherwise couldn’t. Critics contend they put financially vulnerable individuals at greater risk.
“Buy Now, Pay Later” regulation is almost non-existent, but that may change soon.
What Are BNPLs?
BNPL comes in two forms:
- Loans with interest, which you can use to buy something on the spot, but that come with interest like with a credit card.
- Loans without interest where, instead of consumers paying interest on the loan, merchants pay third-party lending companies a fee.
Most BNPL services are interest- and fee-free as long as buyers make payments in full and on time.
Who’s Using BNPLs?
A growing number of Americans are using BNPL services—a trend that began during the Covid-19 pandemic as brick-and-mortar stores closed and more people turned to online shopping.
- 43% of Americans used BNPL services in 2022, up from 31% in 2021.
- More younger people finance purchases with BNPL than older people.
- Lower-wage earners use BNPL more than higher earners.
- BNPL users are more financially vulnerable than non-users
View 1: BNPLs Help Consumers and Retailers
BNPL supporters argue that the services offer a number of benefits to consumers and retailers, including:
- They empower financially constrained buyers. BNPLs enable people with limited resources to buy big-ticket items they might otherwise not be able to afford and to manage their cash flow by spreading payments over time.
- They’re convenient. BNPLs facilitate online shopping, allowing people to make purchases in the moment in simple, understandable terms.
- They facilitate retailers’ immediate payment. Some BNPLs transfer funds to merchants as soon as a purchase is made.
- They protect merchants from credit risk. BNPL providers pay retailers even if customers default.
View 2: BNPLs Can Be Costly
Opponents of BNPLs contend that the services can harm consumers, because:
- They can cost buyers more money than they save them. If consumers don’t understand the terms of their BNPL services and fail to meet them, they can end up paying more in finance charges and penalties.
- They don’t help build good credit—and can harm it. Making BNPL payments on time won’t help users’ credit but paying late or failing to make a payment can damage their credit history, report, and score.
- They incentivize overspending. Paying for an item over time rather than upfront can make it feel less expensive than it is.
An Under-Regulated Industry
To date, the BNPL industry has operated largely without government oversight in the US, but this could soon change. The Consumer Financial Protection Bureau (CFPB), a predatory lending watchdog, is exploring regulatory options. The bureau recently released a report identifying risks that BNPL services pose to consumers, including that they:
- Lead people to amass debt they can’t pay off.
- Use consumers’ data without their knowledge.
The study revealed that a growing number of Americans using BNPL services are in over their heads financially. In 2021:
- BNPL vendors approved 73% of customers for loans, up from 69% the year before.
- The industry’s rate of uncollectible loans increased to 2.39%, up from 1.83% in 2020.
- More consumers using BNPLs got hit with late fee charges: 10.5%, compared with 7.8% a year earlier.
How to Pay Off Debts
If you’ve used a BNPL service and are struggling to pay it off, here’s some advice from The Simple Path to Wealth, on how to pay off your debts.
Paying off your debts is simple in concept but difficult in practice. You must significantly scale back your lifestyle and spending to free up money and discipline yourself to stay the course for months or years until the debt is gone.
Scaling back your lifestyle and using the money to pay off debt lays the foundation for financial independence. When your debt is gone, you’ll be in the habit of living frugally, and it will be easy to shift the money you were paying on debt to investing.
Here are the steps to pay off debt:
- Step 1: List all your debts in order of interest rate with the highest first.
- Step 2: Eliminate all unnecessary spending (coffee, dinners, drinks) so you can put as much as possible toward paying off debts.
- Step 3: Pay the minimum on all debts, then direct any remaining money toward paying down the debt with the highest interest rate first (this saves the most money).
- Step 4: When the highest-interest debt is paid off, focus on the one with the next-highest interest rate, and so on.
An alternative method is to pay off your loans in the order of their size, starting with the smallest ones first. Starting small and racking up some successes gives you a psychological boost that motivates you to take progressively bigger steps.
For more on the alternate method of paying off debts, read our summary of The Total Money Makeover here.
What Not to Do
- Don’t use a credit counseling service. These services cost you money, and they don’t have a magic bullet. There’s no escaping that debt reduction is painful and that you’re the one who must do it.
- Don’t consolidate your loans to get a lower interest rate (this is often done for you by credit counselors). Just work hard and fast to pay them off and your rate will soon be zero—which is better than reducing it from 18% to 12% through consolidation and stretching out the loan.
Experts expect the CFPB to issue “Buy Now, Pay Later” regulations in the near future, and say the bureau may impose oversight similar to what credit card companies face.
A set of clear, uniform rules will ensure that all parties know their rights and have faith in the services being rendered.
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