The Implications of Buy Now Pay Later

By now, you’ve likely heard about – or maybe even used – Buy Now, Pay Later (BNPL), a form of interest-free credit that allows someone to purchase an item, then pay back the money over time – usually in four smaller installments. Typically, BNPL loans range from $50 to $1,000 and are subject to late fees if you miss a payment, according to findings from the Consumer Financial Protection Bureau’s (CFPB) 2022 report on the expanding industry.

For the report, the CFPB surveyed five firms that originated 180 million loans totaling more than $24 billion in 2021, a near-tenfold increase from 2019. Other estimates place the BNPL transactions for 2021 at close to $46 billion.

This new way to pay has gained a lot of traction in recent years as an alternative form of credit for online retail purchases. First made popular among those shopping for beauty products and clothing, BNPL has grown into other areas including travel, groceries, and gas, the CFPB notes. And with a rise in use has come an increase in late fees charged to consumers, according to a survey commissioned by Ascent of 2,000 Americans about their BNPL habits this summer.

In June 2022, some 50 percent of those polled said they had tried out a BNPL platform, which was down from 56 percent in 2020. Meanwhile, late fees were becoming more common among those surveyed with 33 percent of BNPL users saying they made a late payment or incurred a late fee. In the same survey, 47 percent of buy now, pay later users said they are at least somewhat likely to make a late payment within the next year.

For the estimated 50 percent of U.S. residents who haven’t used BNPL services, here’s how making a small purchase works: Think of using buy now, pay later companies like a layaway program, but in reverse. You buy a pair of shoes. You get to immediately take your shoes home from the store. Then, your debit card is charged for your new shoes every two weeks over a six- to eight-week period. Who pays for this? That would be the merchant.

What happens behind the scenes is that the lender pays the store for your shoes when you make the purchase. For this, the lender (say, Affirm) charges the merchant a small flat fee, plus 3-6 percent of your purchase. Then it’s Affirm hitting your debit card until the purchase is paid off. There’s no hard credit inquiry (so no impact to your credit) only an instantaneous soft one from Affirm. And there’s also no cost to you unless you miss a payment. If that happens, you’ll pay a fee, just as you would with a credit card or store card.

The CFPB originally launched an inquiry into the business practices of five buy now, pay later companies in December 2021 following concerns raised by consumer advocates about the potential for people not clearly comprehending how the platforms operate and the risks that could create for their credit scores, among other issues.

Those who would like to report an issue with a buy now, pay later product or service, or any other consumer financial product or service, can submit a complaint with the CFPB online or by calling (855) 411-CFPB (2372).

With reporting by Casandra Andrews