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With buy now, pay later financing options everywhere you look, a trend is growing to use BNPL to cover essentials such as groceries, gas and utilities. You, too, may be wondering: Should you ditch your credit cards and use BNPL to cover your everyday spending?
The BNPL installment financing trend has been growing by leaps and bounds in recent years. More than 59 million people are expected to use BNPL in 2022, primarily for clothing, electronics and furniture.
But the use of BNPL for everyday spending is growing fast. According to a recent report by the Consumer Financial Protection Bureau, the share of such essentials in 2021 accounted for $229.2 million, or 0.9 percent, of BNPL sales. That’s an increase of 434 percent from 2020 levels — and 6,845 percent more than 2019’s $3.3 million level.
What is BNPL?
The way BNPL works, a consumer pays for a purchase in, typically, four equal installments. You would pay the first installment as a down payment when you make your purchase. The other three installments would be due thereafter, in two, four and six weeks.
Overall, BNPL sales dollar volume is up 1092 percent to $24.2 billion between 2019 to 2021. One way for BNPL lenders such as Klarna, Affirm, Afterpay, Zip and PayPal to acquire customers is by partnering with merchants, so that BNPL financing is presented as a consumer choice for those shopping online at the merchants’ websites.
These lenders are moving more to a direct interaction with consumers by approving them for credit on the BNPL lenders’ own apps. These consumers can then shop up to their approved credit limit with merchants who are on these apps.
While the financing is marketed as interest-free to consumers (BNPL lenders’ major source of income is from merchants who use this financing source to increase their sales), the lenders assess late fees when you miss a payment. According to the CFPB, 10.5 percent of consumers were charged at least one late fee in 2021, up from 7.8 percent in 2020.
BNPL apps facilitate dark patterns
Regulation in the BNPL space is still in early stages and federal regulatory authorities such as the CFPB and the Federal Trade Commission, along with some state regulators, have only recently started taking note of this niche.
“We want competition to be based on product quality, customer service, and pricing, not regulatory arbitrage,” wrote CFPB director Rohit Chopra in a blog post.
One concern about the online retail model is that it makes it easier for BNPL lenders to engage in so-called “dark patterns,” or using website design to manipulate consumers. For instance, you might see an advertisement disguised as something else to trick you into clicking on it. Data gathered by BNPL lenders also makes it possible for them to offer merchants customized payments for individual consumers, based on each consumer’s shopping data.
The FTC warns of dark patterns employed by BNPL lenders to gather consumer data, and then use it to nudge them into buying more. “Companies that focus too much on conversion risk hiding or obscuring material information from consumers,” says the FTC, “whether by requiring users to navigate a maze of screens, using non-descript dropdowns or small icons, or burying information in dense terms of service documents.”
The government agency warns BNPL lenders who deploy user interfaces guided by consumer data to make sure that they avoid dark patterns that would interfere with a consumer’s “understanding of the material terms of the transaction.”
BNPL debt vs. credit card debt
Another knock against the BNPL model is that, unlike credit card financing, there are no clear disclosures about loan terms. The FTC notes that any claim made by a BNPL lender should apply to the “typical consumer,” and not just to a subset of consumers. “Money is material,” according to the FTC. “Misrepresentations regarding the cost of a product or the terms of the transaction, including associated fees, are deceptive and violate the FTC Act.”
One more shortcoming of BNPL is that it’s difficult to file for a dispute in case a consumer is not satisfied with their purchase, whereas credit card borrowers have a well-established dispute process, thanks to the Fair Credit Billing Act.
The FTC warns that both the merchant and the BNPL lender involved in a transaction can be held liable when consumers are deceived or otherwise unfairly treated.
And due to BNPL financing’s lack of robust underwriting, consumers could take on multiple loans and overextend themselves, making it difficult to keep up with their other financial commitments. Credit card lenders, on the other hand, look into the big picture of a consumer’s overall financial commitments before approving them for credit.
Other concerns include that consumers could pay off their BNPL purchases using credit cards, which would be effectively using one form of credit to pay off another, which would also overextend them financially. And BNPL lenders’ practice of initially setting up loan repayments as an autopay by default (consumers can later usually change their payment method) would be a violation of the Electronic Funds Transfer Act (which says consumers should have a choice of payment methods in repaying debt).
Credit impact of BNPL
On the credit score front, there are clearly defined rules for credit card lenders to report your activity to the national credit reporting agencies (Equifax, TransUnion and Experian). When you make your payments on time and otherwise maintain good credit habits, there tends to be a positive impact on your credit score. And there are negative fallouts if you miss a payment.
When you use BNPL financing however, the CFPB finds that few of these lenders provide your input to the credit reporting agencies, particularly if you are not delinquent. While the major credit reporting agencies have reported on their plans to incorporate BNPL data, the consumer protection agency is concerned that their plans vary.
For instance, one credit reporting agency is allowing lenders to provide payment data in a format they choose. And others plan to keep BNPL input in “specialty files” that are separate from their core files. “This inconsistent treatment will limit the potential benefits of furnished BNPL data to consumers and the credit reporting system,” according to the CFPB.
What happens if you rely on BNPL for essentials
Why do some choose BNPL over credit cards? One major benefit of BNPL is its ease of access if you need credit in a hurry. Maybe that’s why consumers have been turning to it to buy even essentials.
It’s certainly not a good idea to use BNPL for essentials such as gas and groceries that you will consume before you finish paying for them, says Ed Mierzwinski, senior director of federal consumer program with the consumer advocacy U.S. Public Interest Research Group.
“You will be out of food and unable to travel while you owe greater and greater debts,” says Mierzwinski. “If you’ve started using BNPL for necessities, you need a new budgeting plan as you cannot win.”
He sees credit cards as always a better choice — for all sorts of purchases. “If you can avoid running up credit card debt, credit cards have the best consumer protections,” says Mierzwinski.
“If you use BNPL, you could get confused by varied due dates from different BNPL providers,” he says. “You could end up paying late fees or even interest. Debt collectors will call. It’s not as free as the promises.”
The bottom line
So, should you go with BNPL or credit cards? If you want to be safe in the long run, experts agree, your best best is to stick with cards, at least for now. Credit cards offer protections that BNPL financing doesn’t provide currently.
While regulators such as the CFPB and FTC are taking steps toward regulating this space, there is still a long way to go before BNPL consumers enjoy the robust protections offered by credit cards.
Cash-strapped consumers should be cautious and not rush into BNPL financing just because it is easy to access. If you have complaints about your BNPL financing, you should contact the CFPB or the FTC. Your state might also have a consumer protection agency you could turn to.