Lenders Join Consumers in Feeling the Pain Buy Now, Pay Later

Photo (c) B4LLS – Getty Images

Since the middle of 2021, users of the Buy Now, Pay Later (BNPL) apps have fallen behind in paying for their purchases. This is obviously not good for consumers, but it also weighs on the companies that provide these short-term loans.

The Wall Street Journal reports that BNPL companies like Affirm, Afterpay and Zip are having to adapt due to missed payments and rising interest charges.

“We are putting a real emphasis on sustainable growth, a strong unit economy, and most importantly, accelerating our path to profitability,” Zip co-founder Peter Gray told the Journal.

Alternative to credit cards

The BNPL was all the rage at the start of the pandemic. The system allows consumers to make a purchase with a down payment and then two or three more equal payments every two weeks to complete the purchase.

Many consumers prefer the system because it doesn’t add to high-interest credit card balances that never seem to be paid off. But in 2021, BNPL companies started sending late payment notices.

In September, Credit Karma released a study showing that 44% of Americans had used a BNPL plan. Of these consumers, 34% said they fell behind in their payments.

These missed payments had significant consequences for consumers. Of those who admitted to missing at least one payment, 72% said they believed their credit score had dropped as a result. Almost a third said they had suffered “significant” drops in their credit score.

Annie Millerbernd, one of nerdwallets Financial experts say that many consumers mistakenly believe they are getting a good deal. In fact, it’s just a different financing plan.

“You only have to pay a quarter of the price at checkout, but the actual cost is not discounted at all,” Millerbernd told ConsumerAffairs. “Other payments will follow, usually in two-week increments, and not having a plan to make those payments can derail you.”

This seems to be what is happening. If a consumer shops and makes three BNPL purchases, they may be able to manage the initial three down payments. However, they will have to pay additional payments over the next six weeks.

Instant gratification

Claudia Valladares, Financial Advisor at Kovar Wealth Management, says BNPL is playing on consumers’ appetite for instant gratification. If not properly managed, it can have the same result as credit card debt accumulation.

“The consumer doesn’t realize that these ‘small’ monthly payments can quickly dent their monthly budget,” Valladares told us. “[Spending] $50 here, $35 there will add up! But as I mentioned, our generation wants things now, so we don’t think about the financial consequences at the time of purchase.

Millerbernd advises consumers to know their budget before making a BNPL purchase and to stick to it. Valladares says consumers should probably wait until they can fully pay for the cost of the item before making the purchase.

In March, a coalition of 77 consumer groups asked the Consumer Financial Protection Bureau to oversee and regulate these financial products. The letter warned that BNPL was contributing to an explosion in consumer debt.

“BNPL’s products have largely escaped the scrutiny of federal and state regulators,” the groups said. “While these products may have a place to meet consumer needs if they work as promised, they pose a risk to consumers and should be covered by basic consumer protections.”

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