Americans have grown fond of “buy now, pay later” services, but the “pay later” part is becoming increasingly difficult for some borrowers.
Buy now, pay later loans allow users to pay for items such new sneakers, electronics, or luxury goods in installments. Companies such as Affirm, Afterpay, Klarna and PayPal have built popular financial products around these short-term loans, particularly for younger borrowers, who are fearful of never-ending credit card debt.
Given those features, consumer advocates and financial advisors initially had seen buy now, pay later plans as a potentially healthier form of consumer debt if used correctly. The biggest concern had been late fees, which could act as a hefty finance charge on a small purchase if a borrower is late on a payment. The fees can run as high as $34, plus interest.
“I remember I just had a cartful,” she said. “At first, I thought, ‘Something’s gotta go back,’ and then I saw Afterpay at checkout – you don’t pay for it all right now, but you get it all right now. That was music to my ears.” “If these buy now, pay later plans are not adequately budgeted for, they can have a cascading impact across a person’s entire financial life,” said Andre Jean-Pierre, a former Morgan Stanley wealth advisor who now runs his own financial planning firm focused on helping Black Americans adequately save and budget.
The short-term loans are potentially problematic because they’re not reported on a consumer’s credit profile with Transunion and Experian. Further, the buy now, pay later industry’s customers skew young — meaning they have little credit history. Hypothetically a borrower could take out several short-term loans across multiple buy now, pay later companies — a practice known as “loan stacking” — and they would never appear on a credit report.
“I would not call it a sort of preamble to a potential downturn, but it’s not the same kind of a smooth sailing it’s been,” he said, adding that Affirm is taking a more conservative approach towards lending.
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