In recent years, we’ve seen the rise of “Buy Now, Pay Later”(BNPL) services like Afterpay and Klarna dominate the retail market. For many people, these services are a convenient way to make purchases without having to pay a large sum of money upfront. However, some critics argue that BNPL is are packaged predatory lending scheme targeting low-income and younger consumers. We’ll look at both sides of the argument to help you determine whether BNPL is right for you.
BNPL is a payment option that offers consumers the ability to receive their items or services before paying for them in full. In most cases, the total cost of the purchase is divided into equal installments that are billed to the customer’s debit or credit card on a set schedule. When paid on time, most BNPL companies don’t charge interest or report the transaction to the credit bureaus.
Each provider has different criteria for eligibility and how much credit they are willing to extend. Most ask borrowers to fill out a short application that asks for their name, address, phone number, and date of birth. A credit check is performed and a decision is made in a short amount of time. If approved, consumers can immediately shop at participating retailers, in-store or online.
If borrowers miss payments or do not have the money to pay their balance in full, they are hit with late fees and/or high-interest rates. In some cases, the entire purchase price can end up being much more expensive than if it were paid in full.
A 2021 study by Ascent found that 56.8% of consumers have used a BNPL service, and 31% of BNPL users have made a late payment or incurred a late fee.
Critics blame the high number on ease of use and lack of regulations. They argue that predatory lending practices are at play, as BNPL lenders are taking advantage of financially vulnerable consumers who may not fully understand the terms and conditions of the agreement. They cite glamorized marketing and advertising tactics such as targeted social media ads for misrepresenting the truth.
Government and financial agencies are becoming more concerned that people are at risk of spending more than they can afford, given how easy it is to get approved and the lack of consumer protection laws addressing BNPL. The Consumer Financial Protection Bureau in the US recently opened an inquiry into companies that offer BNPL options, asking all interested parties to submit comments to their inquiry for review. The Financial Conduct Authority in the UK has reviewed the BNPL industry and its practices, and has recommended stronger consumer protection laws and transparent terms and conditions.
According to the Ascent survey, 62% of BNPL users think this service could replace their credit cards, showing that it could potentially become consumers’ first choice of financing purchases.
With BNPL financing, borrowers don’t need a credit score to be approved. Therefore, proponents of BNPL argue that it is helpful for people who do not have access to traditional lines of credit due to low credit scores.
In recent years, the banking industry has been closing branch locations, leaving Black Americans, who typically rely on in-person discussions for banking matters, behind. The FDIC found that in 2017 nearly half of all Black households were unbanked or underbanked—compared with just 20% of white households. This makesBNPL is an accessible alternative for those who may have been excluded from traditional lending.
The three major credit bureaus recently announced they will allow BNPL companies to report borrowers' payment history to their credit report. Whether this is a positive or negative development is yet to be determined.
Before you sign up for a BNPL agreement, it is important to read the terms and conditions carefully. If you have questions, be sure to contact the company’s customer service department to get a better understanding of how they do business.
Everyone’s situation is unique. You must determine if the pros of using the service (getting long-awaited items sooner than later)outweigh the cons (potentially incurring high-interest payments if you pay late). Each time you consider making such a purchase, review your current savings and future earnings to ensure you will have the money to make the payments when they are due. Then trust in yourself to make a decision that best suits your current financial status.
"If we’re not helping all employees of color earn more, invest more and develop genuine autonomy, we’re not uplifting disenfranchised communities. The financial health of marginalized workers is critical to achieving equity and creating a productive and engaged workforce."
Founder of OfColor