The Downsides of Using ‘Buy Now, Pay Later’

The use of “buy now, pay later” credit spiked during the holiday shopping season, retail numbers show. But as easy as it is for shoppers to use the service, some may now find it difficult to make the payments or manage returns.

Here’s what to know, if you find yourself in a pinch.

The services, which are also known as “pay in four” because borrowers often repay the loan in four installments over several weeks, are offered by companies like Afterpay, Affirm, Klarna, PayPal and Zip. More than a quarter of Americans have used the option to pay for items like clothing, electronics and appliances, Consumer Reports found in a summer survey, up from 18 percent earlier in the year.

During “cyber week” — the shopping period that includes Thanksgiving and the Friday and Monday after the holiday — pay-later orders rose 85 percent from the prior week, according to Adobe Analytics. The National Retail Federation says almost half of merchants offer at least one pay-later option online.

The lightly regulated services have caught on because shoppers can quickly get approved for a loan at the point of sale with a cursory credit check. So people who can’t get a traditional credit card may qualify. Borrowers typically pay no interest or fees if they repay on time. And unlike old-time layaway plans, in which customers paid in full before receiving an item, pay-later customers get their merchandise right away. Most people who have used the services say they are satisfied, Consumer Reports found.

Yet there is rising concern among regulators and consumer advocates that the loans lack important customer protections and that borrowers may be getting in over their heads. Some Americans who have been hit hard by inflation are using the services to pay for groceries and other necessities. Borrowers may have trouble managing multiple loans, Consumer Reports found, and more than a quarter of people who have used a pay-later loan reported having at least one problem, like being overcharged or trouble getting refunds.

Late or missed payments may add on fees of about $7 per payment on an average loan of $135, the Consumer Financial Protection Bureau said in a recent report. And because most services automatically bill installments to your debit card, you may get an overdraft fee from your bank — often about $30 — if your balance is too low when the payment is withdrawn.

“The drawbacks outweigh the benefits,” said Ed Mierzwinski, senior director of the federal consumer program at U.S. PIRG, a consumer advocacy group.

Penny Lee, chief executive of the Financial Technology Association, a lobbying group for financial technology companies including several pay-later providers, defended the pay-later services in an email, saying they provide flexibility so customers can fit purchases into their budget cycles. “Using a B.N.P.L. product is transparent,” she said, “as consumers see the exact amount of their payments, the schedule for completing payments and the fees they might incur if they miss a payment, with some companies not charging any late fees at all.” (Affirm and PayPal are among the lenders who don’t charge late fees.)

The consumer bureau, however, has cautioned consumers on the risks of loan “stacking,” or taking out several loans at the same time. “Because you can make multiple Buy Now, Pay Later purchases through different services or merchants in a short time, it’s easy to end up with more debt than you intended, or can afford,” the bureau has advised.

That can land some borrowers in trouble. In 2021, 3.8 percent of borrowers in a consumer bureau study of five pay-later providers had a loan that was “charged off” as bad debt, up from 2.9 percent in 2020, and the upward trend continued through the first half of this year.

That has led consumer advocates to call for pay-later loans to be regulated in the same way as traditional credit cards, with standard disclosures and protections, like the right to temporarily withhold payment while a disputed charge is investigated. “That does not exist with buy now, pay later,” said Rachel Gittleman, financial services outreach manager for the Consumer Federation of America.

The consumer bureau has been studying the industry and will consider taking steps to make sure pay-later loans are “fair, transparent and competitive,” Rohit Chopra, the bureau’s director, said in a recent statement.

A big area of concern is how pay-later loans are handled by the major credit reporting bureaus. “They are not credit-building products,” Ms. Gittleman said. That may change, but most companies don’t regularly report pay-later installments to the major credit bureaus — Experian, Equifax and TransUnion. And when they do, the bureaus vary in the way they use the data, often not including it in traditional credit reports.

But pay-later loans can hurt your credit if you fail to pay. Lenders may send the account to a collection agency, and that can appear on your credit report and hurt your credit score.

The Consumer Financial Protection Bureau this summer cited “inconsistent” treatment of pay-later loans by the credit bureaus as a concern and recommended a standardized approach.

Here are some questions and answers about pay-later loans:

How can I protect myself when using a pay-later loan?

Limit yourself to one or two loans at a time. Consumer Reports found that people who owed four or more loans at once are twice as likely to miss a payment as people with fewer loans. Payments are generally due every two weeks. Chuck Bell, director of advocacy programs at Consumer Reports, recommended that if you do have several loans, you jot down the dates in a notebook or create a spreadsheet.

Some pay-later lenders require automatic payments from your debit card or bank account.To avoid any late fees, check your account on the first due date, he said, to make sure the autopay function is working and funds are available. (Sometimes cards expire, he said, or users incorrectly type in account numbers.)

Avoid paying the loan with a credit card, he said. You may end up paying interest on the purchase if you carry a balance on your card.

What if I can’t make a scheduled installment payment?

If you’re worried that you’ll miss a payment, you should definitely contact your lender, Ms. Gittleman said. You may be able to delay a payment, particularly the first one. Some lenders, however, may limit the number of times you can reschedule a payment. You should be able to find details in the lender’s “terms and conditions” on its website or in its “frequently asked questions.”

What if I have a problem with a return?

Most pay-later services refer customers to the merchant first to handle returns. If a merchant declines to accept a return, the customer then contacts the lender — often online — to file a dispute. Policies vary among pay-later lenders, according to the federal consumer bureau. Some lenders suspend payments temporarily, while others may require that the installment loan be paid as agreed, until the inquiry concludes. You can find return policies on pay-later websites.

Miranda Margowsky, a spokeswoman for the Financial Technology Association, said in an email that “our members work with customers on returns all the time.”

Many pay-later companies offer stand-alone apps where users can be approved for loans that allow them to shop at multiple merchants. These loans should be used with caution, consumer advocates say, because they work using “virtual,” one-time-use credit cards, which may lack the protections of traditional credit cards. And refunds may take even longer. (Some lenders may also charge fees for loans approved using the virtual cards.)

If your refund isn’t resolved, you can complain online to the Consumer Financial Protection Bureau and the Federal Trade Commission.