ROCHESTER, N.Y. — As prices rise, more people are turning to Buy Now Pay Later (BNPL) loans to manage expenses. According to a J.D. Power study, 37% of U.S. consumers have used BNPL in the last 90 days, which is a 5% increase.
The small loans allow shoppers to spread out purchases over four to six payments.
“There are some core features of BNPL that are distinct from other forms of credit. These are zero interest products. There are no revolving balances so you’re never paying compounding interest on interest,” Miranda Margowski of the Financial Technology Association said.
Unlike a credit card, BNPL can be a useful, often no-cost tool. The danger lies in using BNPL too often. Nearly a third of users say they’re getting those short-term loans for everyday expenses like groceries, making it easy to get over your head.
“One of the key safeguards built into the product if you are late for any reason in paying your BNPL loan, you are paused from using the service again until you complete that payment to prevent the accumulation of debt,” Margowski said.
But a report by the Consumer Financial Protection Bureau found that financially strained customers often simply take out new loans with another BNPL company. In fact, 63% of BNPL borrowers have multiple loans, and 33% have loans with more than one Buy Now Pay Later lender.
“They’re trying to draw you in and help you become a customer and then they offer longer term loans and they all have interest rates,” Lisa Gill of Consumer Reports said.
Interest rates can be as high as 37%. And unlike standard BNPLs, those loans require hard credit checks. If used sparingly, Buy Now Pay Later loans can help stretch your dollar. But borrowers have to be aware of the risks.
Another criticism of BNPLs is that returns can be a hassle because you have to get your money back from the BNPL, not the retailer. But New York recently passed a new law requiring the BNPL provider to provide timely refunds. The law also prohibits excessive fees and requires the BNPL to tell you if your loan will be reported to the credit agencies.
Consumer Alert: Buy Now Pay Later loans surge in popularity, but experts warn of hidden risks WHEC.com.
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