Buy now, pay later (BNPL) loans offered by services like Affirm, Klarna and Afterpay are exploding in popularity, and it’s easy to see why.
This buzzy new kind of loan lets consumers pay for their online purchases in a handful of interest-free installments over a period of a few weeks or a few months. Approval is generally quick and easy because it happens seamlessly within an online retailer’s checkout page.
As online shopping surged during the pandemic, so too did the ubiquity of BNPL financing. A new study from the Consumer Financial Protection Bureau (CFPB) found that the number of BNPL loans issued by five major lenders grew by 970% between 2019 and 2021. The loans were worth a staggering $24.1 billion in 2021, compared to $2 billion in 2019.
BNPL products can offer serious benefits, but they also come with drawbacks. Among other concerns, these loans are "engineered to encourage consumers to purchase more and borrow more," the CPFB said in a news release, putting borrowers at a heightened risk of taking on debt they can't pay off.
That's why the CFPB has announced its intention to regulate BNPL lenders in a similar way to how it treats credit card companies.
BNPL executives applauded the CFPB's efforts to improve transparency and consumer protections in the industry. Affirm CEO Max Levchin called the new report "a big step forward for honest finance" on Twitter.
"Consumers deserve absolute clarity," Levchin wrote, "and should have the flexibility to pay over time without late fees, revolving, or deferred interest."
Klarna CEO Sebastian Siemiatkowski tweeted that he is looking forward to working with the CFPB to "accelerate sound, proportionate regulation of the industry that will drive competition and improve outcomes for all consumers."
Here’s everything you need to know about the pros and cons of buy now, pay later loans — the credit card alternative often hyped as the next big thing in online shopping.
What are the benefits of BNPL loans?
BNPL lenders tout their products’ ease of use, smooth interfaces and the fact that they can be cheaper than other forms of consumer credit. Not to mention their ability to extend financing to those who may not qualify for credit cards or personal loans because of a poor or limited credit history.
“The financial and operational benefits [of BNPL loans] over legacy credit products are real and sizeable,” the CFPB’s report reads. Here’s an overview of those benefits:
BNPL lenders generally do not charge interest on installment payments. That’s a major draw for consumers.
No late fees
Some BNPL lenders do not charge late fees, but others do. It’s important to understand the terms of the loan before you finalize a transaction.
Easy repayment structure
Most BNPL loans are designed to be paid off in four installments over a matter of weeks. Once that loan is paid, it disappears — there’s no revolving credit line like there is with a major credit card. And since many BNPL lenders enable autopay (and require customers to keep a debit card or credit card on file), consumers are less likely to forget a payment. Unfortunately, mandatory autopay can also lead to issues like overdrafts, the CFPB notes.
Online shoppers can be approved for a BNPL loan in seconds.
What are the risks of BNPL loans?
The benefits cited above may all be outweighed by the drawbacks. BNPL loans can encourage overspending and overborrowing, and they don't come with the baked-in protections that credit cards have. Consumers should understand these risks before they use a BNPL loan:
The CFPB cautions that the ease of taking out a BNPL loan may lead consumers to take out too many loans at once and accrue more debt than they’re able to repay. Taking out BNPL loans on a regular basis for a long period of time could also cause financial stress, the CFPB said.
Credit score damage
Credit bureaus like Equifax are beginning to incorporate BNPL data into credit reports. That could be a good thing for many (a track record of on-time payments will boost your credit score), but it also means a late BNPL payment could hurt your score and make it more difficult and more expensive to borrow down the line.
Some BNPL change service fees and late fees. A BNPL late fee is generally in the ballpark of $7 per missed payments for loans that average about $135, according to the CFPB, but the fee structure will vary by lender.
If you finance a BNPL loan with a credit card that you don’t pay off in full, you’ll end up paying interest on a supposedly “interest-free” transaction.
Data privacy issues
“Buy Now, Pay Later lenders can gather extraordinarily detailed information about your purchase behavior, in a way traditional cards cannot,” CFPB Director Rohit Chopra recently warned. Lenders can use that data to encourage users to spend and borrow more, he said.
Fewer consumer protections than credit cards
BNPL loans are a very recent innovation. Regulations surrounding these products aren’t as robust, and consumers have fewer protections when something goes wrong. It can be more difficult to settle disputes or return products purchased with a BNPL loan compared to products purchased with a credit card.