Personal finance: As “buy now, pay later” plans grow, so do delinquencies

Americans have become 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 as new sneakers, electronics, or luxury goods in installments. Companies such as Affirm, Afterpay, Klarna, and PayPal have created popular financial products around these short-term loans, especially for young borrowers who fear endless credit card debt.

Now, as the industry accumulates customers, chargebacks are on the rise. Inflation squeezes consumers, making it harder to pay off debt. Some borrowers do not budget properly, especially if persuaded to take out multiple loans, while others may have been credit risks to begin with.

“You have an industry with a higher concentration of subprime borrowers in a market that hasn’t been effectively tested (that kind of economy), and you have a kind of toxic brew of worries,” Michael Taiano said. , an analyst at Fitch Ratings, who co-authored a report in July highlighting some of the industry’s concerns.

The most popular type of buy now, pay later loan allows for four payments over six weeks – one payment at the time of purchase and three more that borrowers often try to synchronize with pay periods. Longer term loans for larger purchases are also available. Most short-term loans bear no interest. Companies that charge interest can clearly state in advance how much a borrower will pay in finance charges.

Given these characteristics, consumer advocates and financial advisors initially saw buy now, pay later plans as a potentially healthier form of consumer debt if used correctly. The main concern was late fees, which could be a heavy financial burden on a small purchase if a borrower was late on a payment. Fees can reach $34, plus interest. But now that chargebacks are on the rise and companies are more aggressive in marketing their products, advocates see the need for additional regulation.

The industry is growing rapidly, according to a report by the Consumer Financial Protection Bureau. Americans took out about $24.2 billion in loans under buy-it-now, pay-later programs in 2021, up from just $2 billion in 2019. That industry-wide figure is not expected than climb even more. Klarna customers purchased $41 billion worth of products on its service globally in the first six months of the year, up 21% from a year ago. At PayPal, revenue from its “buy now, pay later” services more than tripled in the second quarter to $4.9 billion.

Technology analyst Jasmine Francis, 29, said she first used a buy now, pay later service in 2018 to buy clothes from fast fashion brand Forever21.

“I remember I just got a cart,” she said. “At first I thought, ‘Something has to go back’, then I saw Afterpay at checkout – you don’t pay for everything right now, but you get it right away. It was from music to my ears.

It is unclear to what extent clients are using buy now, pay later loans healthily. Fitch found that chargebacks on these services rose sharply in the 12 months ended March 31, while chargebacks on credit cards remained flat. And according to the CFPB, a growing percentage of the loans the industry makes are being written off — or loans it considered so delinquent they were likely uncollectible. The industry charge rate was 2.39% in 2021, a figure that is now likely higher given the economic turmoil this year. In 2020, this figure was 1.83%.

“This upward trend in delinquencies continues,” CFPB director Rohit Chopra said on a call with reporters.

Credit reporting company TransUnion found that buy now, pay later borrowers are using the product just as much as credit cards, racking up debt on top of additional debt. A Morning Consult poll released this week found that 15% of buy now, pay later customers use the service for routine purchases, such as groceries and gas, a pattern of behavior that is ringing alarm bells at home. financial advisers. The CFPB report also found that a small but growing number of Americans also use these products for routine purchases.

“If these buy now, pay later plans aren’t budgeted properly, they can have a cascading impact on a person’s entire financial life,” said André Jean-Pierre, a former Morgan Stanley wealth adviser who now runs his own financial planning company focused on helping black Americans save and budget properly.

Another concern of consumer advisors and advocates, as well as lawmakers and regulators in Washington, is the ease with which consumers can layer on these installment loans.

Speaking at a Senate Banking Committee hearing on new financial products, Sen. Sherrod Brown, D-Ohio, highlighted the benefits of plans that allow consumers to pay for things in installments. But he also criticized the way the industry promotes the plans.

“The ads encourage consumers to use these bundles for multiple purchases, across multiple online stores, racking up debt they can’t afford to repay,” Brown said.

Short-term loans are potentially problematic because they are not reported on a consumer’s credit profile with Transunion and Experian. Additionally, buy now, pay later, industry customers are young, which means they have little credit history. In theory, a borrower could take out multiple short-term loans across multiple buy-now, pay-later businesses — a practice known as “loan stacking” — and they would never show up on a credit report. If a person puts in too many buy now, pay later items, budgeting can be difficult.

“It’s a blind spot for the industry,” Fitch’s Taiano said.

In a statement, the industry trade group “buy now, pay later” pushed back on the characterization that its products could burden borrowers with too much debt.

“With zero to low interest rates, flexible payment terms and transparent terms and conditions, BNPL helps consumers manage their cash responsibly and live healthier financial lives,” said Penny Lee, CEO of the Financial Technology Association.

Meanwhile, providers of buy-it-pay-later services see rising chargebacks as a natural consequence of growth, but also an indication that inflation is hitting the Americans most likely to use these services the most. harder.

“We’ve seen some stress (among those with the lowest credit scores), and those are starting to struggle,” said Max Levchin, founder and CEO of Affirm, one of the largest businesses that buy now, pay later.

“I wouldn’t call it some sort of preamble to a potential slowdown, but it’s not the same kind of smooth sailing,” he said, adding that Affirm is taking a more conservative approach to loans.

Buy now, pay later took off in the United States after the Great Recession. Analysts said the product was largely untested during a large period of financial hardship, unlike mortgages, credit cards or car loans.

Despite these concerns, the consensus is buy now, pay later, companies are here to stay. Affirm, Klarna, Afterpay, which is owned by Block Inc., as well as PayPal and others are now widely integrated into internet commerce.

Moreover, the growth of the industry attracts more and more players. Tech titan Apple announced earlier this summer Apple Pay Later, where users can make purchases on a four-payment plan over six weeks.

“I usually schedule the purchases I make using PayPal ‘Pay in 4’ so that my due dates for purchases land on my payment dates because due dates are every two weeks,” said said Desiree Moore, 35.

Moore said she tries to use buy-it-now, pay-later plans to cover purchases that aren’t part of her usual monthly budget, so as not to take money away from her children’s needs. She is increasingly using the plans with inflation making items more expensive and so far able to keep up with the payments.

Francis, the technical analyst, said it is now common for his friends to pay for trips with installment loans, so as not to completely empty their bank accounts in an emergency.

“If I come back from vacation and I have two flat tires, and I just spent all that money on plane tickets, that’s $400 that you don’t have right now,” he said. she stated. “Most people don’t have savings. They’ve got just enough for those flat tires.

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