Buy Now, Pay Later: Understanding the Hidden Financial Risks

Installment payment plans could lead to a world of financial hurt.

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Key points

• The CFPB is sounding a warning that "buy now, pay later" plans carry certain risks.
• The agency plans to collect further information on these programs to address a series of concerns.

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It used to be the case that if you couldn't afford to pay for a given product outright, you'd put it on a credit card and pay off that balance over time, while accruing interest on it. These days, there's supposedly a better way to finance purchases – "buy now, pay later" plans, or BNPL plans.

BNPL plans let consumers pay off purchases in installment payments over a short period of time – usually three months or fewer. These plans offer one distinct benefit over credit cards, and it's that they don't charge interest or fees as long as their payment schedules are adhered to.

But there's a downside to using these plans. For one thing, they don't have very strict requirements to qualify, so consumers with shaky credit histories can often get approved to finance purchases – and then run the risk of falling behind, having their credit score damaged, and incurring fees.

Now, the Consumer Financial Protection Bureau (CFPB) wants to dig deeper into BNPL plans. So far, it's issued a series of orders to a handful of well-known BNPL providers to collect information regarding a few key concerns. Here's what the CFPB is most worried about – and what consumers should be aware of, too.

1. Accumulating debt

The concept of BNPL isn't totally new. Back in the day, it was common for consumers to make big-ticket purchases, like furniture, using layaway plans that allowed them to pay for those items over time.

The problem with BNPL plans is that they're becoming a go-to option for everyday purchases – not just larger ones. And that could open the door to more spending. It could also make it harder for consumers to keep track of their different payment plans and schedules, and lead some to take on dangerous levels of debt.

2. Loopholes in regulatory requirements

Credit card companies are required to provide certain disclosures before consumers sign agreements. But many BNPL products don't provide the same level of information, leading to consumers being less informed about their rights, and also, about the risks they're taking on.

As an example, the CFPB says that many BNPL companies don't provide information about dispute resolution protections, whereas credit card companies provide that information as a matter of course. It's not totally clear as to why BNPL providers can get away with providing less information, but clearly, it's something the CFPB will be looking into.

3. Data harvesting

The nature of BNPL agreements is such that the companies that provide these services gain access to key consumer information. Those companies can then use that data to specifically market to consumers, driving them to spend more and make poor financial decisions.

It's common for BNPL companies to promote certain merchants or products. But knowing which audiences to target makes certain consumers more likely to get lured in by those marketing tactics.

Are BNPL plans dangerous?

They can be. Like credit cards, they can be a convenient way to pay for purchases, but it's important for consumers to understand the risks involved.

BNPL plans can lead to debt, credit score damage, and interest and fees when installment payments aren't made on time. While consumers don't necessarily have to stay away from them, the fact that the CFPB is digging deeper is a good thing.