Buy Now Pay Later No Upfront Payment – Brittany Anderson Givens began using “buy now, pay later” services like Zip to spread the cost of mortgage payments across multiple incomes.
When the pandemic struck, Givens, of Memphis, Tennessee, was unable to work because she had just learned she was pregnant with her second child and guidance on COVID-19 and pregnancy was unclear.
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“I don’t have the best credit rating and if we had to do a credit check for that, it wouldn’t help us at all,” he said.
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The flexibility of being able to pay interest-free for six weeks allows her to buy nice things, like new clothes from Shein, without hurting her credit score.
While consumers like Givens prefer to use “buy now, pay later” devices to pay for everyday purchases, consumer groups and financial experts are bemoaning these new payment ventures.
They say the lack of regulation can result in people taking on debt without the protections that other lenders are required to follow.
Late last year, the U.S. Consumer Financial Protection Bureau released an investigation into current shopping, payment, and post-marketing practices.
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The federal government arm that once cracked down on payday lenders who have been taking advantage of customers with exorbitant interest rates now wants to know if the proliferation of BNPL’s services could put users at risk, which ones.
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BNPL offers customers the option to pay prizes in four or more installments, usually interest-free. The number of companies offering these short-term loans has exploded in recent years, fueled by the rise of online shopping during the pandemic.
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“It’s really difficult to pay for anything online without having the ability to make four simple payments over time,” said Marshall Lux, a colleague at the School of Harvard Kennedy.
BNPL’s service typically requires an initial payment of 25% of the total purchase price and then takes automatic payments from the customer’s credit card or direct debits for three more payments every two weeks. As a rule, these loans do not require a credit check and are not reported to the credit bureaus
“I’m not saying anyone gets it wrong, that big companies get it wrong,” Lux said. But bad actors can do the wrong thing. And I worry about that section of society that is at risk of getting into trouble. I worry about young people ruining their credit.
According to Lux research, customers using BNPL tend to be young and earn less than average, but the growing industry is becoming more popular among all age groups.
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In fact, 60% of US consumers said they plan to use BNPL products in the next year, according to a survey conducted by management consulting firm McKinsey and Company last summer.
BNPL’s sales accounted for 2.9% of global e-commerce businesses last year — more than $142 billion — according to a report by Worldpay, a FIS payment processing company. Worldpay expects that figure to double to 4.2% by 2024, while other estimates are even higher. According to market research by Kaleido Intelligence, BNPL will account for $680 billion worth of transactions by 2025, accounting for 12% of all merchandise sales in the e-commerce equivalent.
More BNPL products are being announced, and Apple unveiled its own payment plan, Apple Pay Later, last week.
Marketers love it because it increases their sales. RBC Capital Markets reported in 2021 that online BNPL increased conversion rates by 20-30% and average revenue by 30-50%. The conversion rate is the percentage of people who visit a store and end up buying a product.
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And consumers like the ability to spread payments and increase their spending power, especially people who are classified by the lending industry as low-income borrowers or who have bad credit histories, who often feel overwhelmed by a three-digit number they don’t quite understand. .
Credit monitoring companies “really want to find a more people-friendly way to manage and make more money by assessing people’s creditworthiness,” Givens said.
But credit advisors like Rachel Klopfer of Springfield, Ohio, are starting to see clients who have had trouble using BNPL’s services. They have many loans at once, increasing their debt burden.
“They find it helpful because they don’t add to their credit card debt, but it ties them up,” he said of those who pay with their debit cards.
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“Buy now, pay later is a new take on the old layaway plan but with a modern, expedited approach where the customer gets the product right away but gets the bill right away,” CFPB Director Rohit Chopra said in announcing the Opinion poll.
A CPFB spokesman said in late May that there was no timeline for the investigation to be completed or for the release of a report on the agency’s findings. Such a report may contain recommendations for new regulations for the BNPL industry.
Klopfer, a credit advisor, said he’d only recently come across loans from Affirm and other BNPL digital services while talking to clients, but the concept isn’t new.
He recalls counseling a woman ten years ago who had multiple payment plans on a pay-as-you-go list.
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Mail order companies like Fingerhut and Stoneberry have offered payment plans that don’t require low credit for decades.
Most cell phone users get the latest smartphone from their carrier and pay in monthly installments along with their network plan. Retailers like Lowe’s, Sears, and Walmart offer payments or payment methods.
However, the difference between layaway and BNPL is that if there is no activity, you will not receive your purchase until the final payment is made.
While consumers have long been able to pay for large purchases like furniture and electronics in stores, doing so often required a credit check to qualify.
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BNPL companies like PayPal, Affirm, Klarna, Zip, Afterpay, Sezzle, Shop Pay and others make money by partnering with merchants who pay them a fee every time they make a purchase from the company.
“Klarna makes money by charging merchants a small fee to offer our services to their customers, such as merchants who already pay to process credit card transactions,” said the company spokesman.
Klarna says its global distributors received 301 million clicks from customers through the Klarna app in 2021, which is more than double the app usage compared to 2020.
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While most BNPL companies offer interest-free, short-term loans, some have long-term interest payment options that offer additional benefits.
If a customer buys an item and chooses to pay in four installments, the seller will receive the full amount from BNPL company. The future payments from the customer are payments to the bank that sponsored the loan from the BNPL company.
For BNPL’s regular plans, lending companies say they don’t carry out a rigorous credit check and don’t report the loan to the credit bureaus.
According to Credit Karma, a harsh inquiry or credit check is typically performed by a lender to determine if you qualify for a loan. It can lower your credit score, especially if you have a lot of bad inquiries in a short period of time. A simple request is usually made for background checks and will not affect your credit score.
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Equifax announced a formal process to add BNPL to legacy US credit reports. Late last year, giving BNPL providers the ability to report the popular Pay-in-4 loans from February 28, 2022. But it is not compulsory.
However, Experian has set up a separate office for BNPL providers to exchange payment details. Payment history and the number of BNPL loans taken at a time can be tracked, but all information is kept separate from the standard data from the credit reporting agency Experian to protect customer information from negative influences.
The big three consumer credit agencies all said they are in talks with BNPL firms to develop standards for this new industry.
“Reporting to the credit bureaus helps protect consumers and build their credit history,” the spokesman said. “It also helps those responsible to assess risks correctly and to protect consumers from being overwhelmed.”
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BNPL programs that accrue interest or are spread over more than four installments may be reported to credit bureaus as “closed” loans.
According to Chi Chi Wu, attorney for the National Consumer Law Center, this is an important point.
Information such as when you opened your account and available funds are factored into your credit score, Wu said. A term loan that is paid off and closed after a few months and was for a small amount will not help you.
“These things may not look good if BPNL’s loans are reported as a series of short-term loans or closed loans,” Wu said.
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