The thing about buy now, pay later is that the last part always comes. Sometimes the pay ends up being more than you think you’d sign up for, and often for things you shouldn’t have bought in the first place.

The buy now, pay later – or BNPL – trend has been on the rise for years, driven by companies such as Afterpay, Klarna and Affirm. Pretty much every time you go to buy something online lately, there’s an offer to pay in installments. It sounds simple enough at first glance: you make a purchase, and instead of paying it all upfront, it’s split into four interest-free payments, usually every two weeks. TikTokers promote it as a savvy way to shop on a budget, an option to get the things you want and need even if you don’t have enough to foot the whole bill right now. Also, hey, you’re not dealing with bad credit card companies.

If this all sounds a little too good to be true, that’s because it is. That overpriced dress you just bought is still overpriced, but the small payments force you to splurge. You’re still walking around in pants that aren’t technically paid for.

“It’s marketed as interest-free, but consumers may find that they end up being charged more than they realize,” said Nadine Chabrier, senior policy and litigation adviser at the Center for Responsible Lending. “If they lose track of their payments or have multiple purchases now, pay purchases later, they can get payment return fees, missed payment fees, account reactivation, rescheduling, all kinds of fees hidden things they weren’t aware of at the start. ”

BNPL companies often don’t do thorough consumer credit checks, which means people end up in debt that they can’t pay. If someone is wrong, he can be hit with late fee and see their sounded credit scores. And screwing it up is easy to do if people take out multiple loans or just aren’t used to paying on a semi-monthly basis like other bills. If a consumer buys something on BNPL and the product is not what it is supposed to be, there is an error or they must return it, get their money back can be more complicated than with other forms of payment. The ability to pay in instalments encourages consumers to buy more than they otherwise would.

Currently, many BNPL companies exist in a kind of regulatory gray area and circumvent the laws that apply to more traditional lenders. There’s a push among consumer advocates and in states such as California and Massachusetts to strengthen oversight of BNPL companies and bring them online, and the Consumer Financial Protection Bureau, or CFPB, the looks, too. It’s just an industry hoping to squeeze in a victory at the regulatory mole.

“You always have these new companies saying, ‘We’re different, we’re new, we’re fast, and regulators don’t know how to regulate us because we’re so new and fast and technical or whatever. , “” said Chi Chi Wu, an attorney at the National Consumer Law Center. “And you know what? No.”

The cost of deferring payment

Buy now, pay later, businesses make a lot of their money from merchant fees, which means they take some discounts from purchases. 2 to 8 percent. That’s more than credit cards take, but as Chabrier explained, merchants are willing to pay because the ability to pay in installments increases basket sizes. “They’re actually tricking people into buying more than they normally would because they’re dividing it,” she said.

You might stop more by spending $100 on the spot than spending $200 split into four installments of $50.

These companies can also make money when consumers using them make mistakes, Chabrier noted. “If you, like a lot of people, have five purchases now, pay for purchases later, and you make one wrong move, then you’re going to be hit with these unexpected charges,” she said, as late fees if you miss a payment, “and possibly overdraft fees from your bank.”

These missteps are common. A recent survey from LendingTree found that 42% of Americans who took out a BNPL loan made at least one late payment. According the wall street journalBNPL companies are seeing an increase in bad debts and late payments.

Consumers who use BNPL services tend to be youngerand many are people of color. some too have a subprime loan, which means they may struggle to access traditional forms of credit. BNPL companies say they provide financial inclusion, extending credit to people who cannot get it elsewhere. This may be true in many cases, but the line between predatory and progressive is blurred. A study of TransUnion found that BNPL customers have more credit products, such as credit cards, retail cards and installment loans, than the general “credit active” population. Lenders in the space often have no idea whether the consumers they work with actually have the ability to pay.

“With buy now, pay later, you’re not considering other financial obligations that consumers may have,” said Elyse Hicks, consumer policy adviser at Americans for Financial Reform. You do not have to look away on the internet to find stories millennials and Gen Z over their heads in debt from BNPL, and with inflation and the current precarious state of the economy, the situation could get worse.

We still don’t really know how to manage credit or regulate it

How to approach credit – who should get it, how much should it be charged, what happens to people who are left behind – is a difficult question. We want people to be able to buy things, and credit is a central force in the economy. Millions of people in the country do not have access to banks and getting kicked out of the more conventional credit system. We also don’t want people to be hurt because of debts they can’t repay or that lenders take advantage of because they don’t understand the terms.

Consumer advocates don’t necessarily argue that BNPL shouldn’t exist, but they say it needs more scrutiny and regulatory oversight, and that people should have a better idea of ​​what they’re getting into. . Consumer protection laws, such as the Truth in Lending Act, which protects consumers against inaccurate and unfair credit practices, are not yet applied to the BNPL. (There’s a reason BNPL companies make four payments – the 1968 law kicking in on consumer loans once they are divided into five.)

The “jury is still out exactly what the BNPL entails for consumers,” said Robert Lawless, a University of Illinois law professor who specializes in consumer credit. He gave the example of payday lenders and buy here, pay here car lots, which at first glance seem to offer useful solutions for people with weak or invisible credit. “But we know the facts, as they are applied, these are very abusive industries,” he said. Over the years, many consumer credit innovations have claimed to be for the benefit of consumers. “I think we don’t have enough experience yet to know where to buy now, pay later is going to be fine.”

He pointed out that the problem of companies trying to circumvent credit and debt laws is not new. In the 20th century, lenders and shops attempted to circumvent the usury laws that dictate interest rates by claiming that they did not charge interest, but rather based prices on a “price-time differential “Lawless said, which means charging one price if a product is paid for upfront and another if paid for in installments over time. “If it sounds like bullshit, that’s because it is. It’s just interest by another name.

There are countless examples of tactics and products that attempt to circumvent financial regulations and rules. There are so-called bank lease agreementswhere high-cost lenders attempt to circumvent state interest rate caps, and earned wage access products – essentially, payday advances – which the companies claim technically fall outside the Truth in Lending Act because they have no fees (instead, for example, some of these companies ask for tips). “It’s along this continuum of new products and lack of regulation that you have to tackle,” Chabrier said.

Most of the time, regulators catch up and these issues are resolved, but it takes time. Meanwhile, on offers such as buy now, pay later, many consumers end up losing their shirts (only partially refunded). It is worth noting Apple is about to offer a BNPL product as well. “What happens when you convince a generation to spend more than they can afford? Scott Galloway, NYU marketing professor and podcast co-host Pivot, recently requested in New York magazine. We may be about to find out.

As Bloomberg described recently, between the threat of regulation, economic uncertainty and consumers drowning in debt, many companies in the space are already struggling, and their values are free fall.

BNPL companies may be in deep trouble now, as so many of their clients already are.

We live in a world that constantly tries to trick and deceive us, where we are always surrounded by scams, big and small. It may seem impossible to navigate. Every two weeks, join Emily Stewart in examining all the little ways our economic systems control and manipulate the average person. welcome to The great pressure.

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