Just like credit cards, “buy now, pay later” plans (BNPL) allow consumers to make a purchase and deal with the payment another time. BNPL loans surged in popularity during the pandemic, especially among Gen Z, but now the Consumer Financial Protection Bureau (CFPB) is indicating these programs pose a significant risk to consumers.

                By                    Josephine Nesbit

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BNPL typically allowa consumers to pay for purchases in four installments while promising little to no fees, no interest and quick approval. However, the CFPB found that younger consumers are more likely to have loans in default or sent to a third-party debt collector, Bloomberg reported. A Federal Reserve report found that roughly 11% of borrowers paid a late fee in 2021 and 18% of consumers between the ages of 18 and 29 fell behind on payments that same year.

Bloomberg noted that BNPL firms Klarna and Afterpay claim to have more safeguards than credit cards, emphasizing that they don’t charge interest and either have no late fees or cap them. However, this hasn’t stopped younger consumers from borrowing from multiple providers or spending more than they would have if BNPL hadn’t been available.

A CFPB report identified several potential consumer risks, including overextension, data harvesting and the loans being structured in a way that required autopay or lacked clear disclosures of loan terms. Many borrowers also began loan stacking, which the CFPB said is a significant risk to consumers.

BNPL also has potential long-term implications. Major credit bureaus Equifax and Experian have said they will start including BNPL purchases on consumers’ credit reports, Bloomberg reported, and loans sent to debt collectors can also be reported, which can hurt credit scores.

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