Benefits and Risks of Buy Now, Pay Later Products

Advocate Andy

Services like AfterPay and Klarna are convenient but risky

A group of U.S. Senators led by Jack Reed of Rhode Island wrote a letter to the Consumer Financial Protection Bureau (CFPB) calling for closer scrutiny and better regulation of Buy Now, Pay Later (BNPL) products (such as Klarna and AfterPay).

The Senators noted:

“While the emergence of BNPL as affordable small-dollar credit has potentially provided an alternative to more costly forms of credit, these products also have the potential to cause consumer harm. Many BNPL providers structure these products in an effort to avoid certain consumer protection obligations under the Truth in Lending Act or the Military Lending Act, which generally apply to loans that are repayable in more than four installments or are subject to a finance charge. BNPL products generally do not receive all of the protections credit cards have, including those governing ability-to-repay, monthly statements, reasonable and proportional penalty fees, and the ability to raise merchant-related disputes.

Reed was joined by Senators Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts, Chris Van Hollen of Maryland, Tina Smith of Minnesota, and Jon Ossoff of Georgia in calling for CFPB oversight of the BNPL products.

The call by these Senators comes as consumer groups have noted both the benefits to consumers and the potential risks.

Lauren Saunders of the National Consumer Law Center (NCLC) says of these products:

Buy-now-pay-later products, if affordable and truly free to the consumer, may help consumers manage larger purchases without the long-term debt and high costs of credit cards. But some BNPL products may have deceptive and abusive profit models built on the expectation of late fees from struggling consumers.

In addition to late fees, a report from CNBC notes that BNPL products can have a negative impact on a consumer’s credit score:

“While the record of on-time payments can boost your credit, you could see a blow to your score from using the [BNPL] service,” says Leslie Tayne, founder and managing director at Tayne Law Group. “Every purchase you make with a POS loan is considered a separate account on your credit report that gets closed once you pay off the balance. Since these loans are short-term (generally six weeks), they can bring down the average age of your credit history considerably — especially if you’re a regular borrower.”

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Andy Spears is a middle Tennessee writer and policy advocate. He reports on news around public policy issues - education, health care, consumer protection, and more.

Nashville, TN
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