The Consumer Financial Protection Bureau said Thursday that these installment payments come with “multiple areas of consumer loss risk,” including data harvesting, debt accumulation and “debt stacking” — or linking multiple payment plans at once.
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Buy now, pay later lenders — including companies such as Affirm, Afterpay, Klarna, PayPal and Zip — “don’t provide standard security elsewhere,” as Consumer Watchdog reports.
“Buy Now, Pay Later is a rapidly growing loan that acts as a close substitute for credit cards,” Rohit Chopra, director, CFPB, said in a statement. “We will work to ensure that borrowers have the same security, whether they use a credit card or buy now, pay off the loan later.”
Marshall Lux, a fellow at the Mossvar-Rahmani Center for Business and Government at Harvard Kennedy School, called the government’s findings “very encouraging.”
“It was certainly a call out to non-banks that it would be difficult to proceed,” Lux said. “The good news is they will be regulated,” he said.
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Buy Now, Pay Later is essentially an interest-free loan that “gained traction with consumers who seek the flexibility of being able to pay for goods and services over time, but who don’t want to pay for other credit.” products may be ready,” the CFPB said. ,
However, as it becomes more popular, users have become more prone to overspend and default or late payments, the report also found. That behavior has hurt the credit histories of some borrowers.
“Buy Now, Pay Later is designed to encourage consumers to shop more and borrow more,” the report said. “As a result, borrowers can easily take out multiple loans at multiple lenders within short time frames or buy now, pay later loans can impact other loans.”
Buy now, pay later providers said that access to no-interest loans works in most people’s favor.
“The fact remains that consumers are choosing to buy now, pay later as a competitive alternative to high-interest credit products,” said Penny Lee, CEO of the Financial Technology Association. “We look forward to continuing to work with regulators such as the CFPB to drive positive consumer outcomes.”
In a statement, Affirm said it was “encouraged by the CFPB’s findings following their review.”
“Our top priority is to empower consumers by providing a secure, honest and responsible way to make payments over time without any delays or hidden fees,” the company said.
A Klarna spokesperson said, “Low-cost, low-risk, no-interest products like BNPL should not be regulated in fundamentally the same way as high-cost credit products that rely on consumer fees and revolving credit. “
‘There’s going to be more damage’
Lux said the government’s action is promising, adding that the CFPB report is based on data from earlier in the year and “does not reflect the damage done over the past few months” as “inflation has gone through the roof.”
Now, more consumers are tapping Buy Now, pay later services for “essential” purchases, such as groceries, as rising prices make it harder to cover everyday costs, other data shows.
In addition, the rapid growth of Buy Now, Pay Later is primarily driven by younger consumers, with two-thirds of Buy Now, Pay Later borrowers being considered subprime, said Lux, who particularly makes it weak.
He said the government would also take time to implement more inspections. And in the meantime, “there’s going to be more damage.”
“In a best-case scenario, there is some change in the report, but I think that which is more likely will just take time to take effect,” Lux said.
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