Consumers using buy now, pay later (BNPL) are likelier to use other credit products and high-interest financial services than non-users of BNPL, a recent report by the Consumer Financial Protection Bureau (CFPB) said.
For example, 62% of BNPL borrowers said they used retail credit cards compared to 44% of non-BNPL consumers. Additionally, 32% of BNPL users relied on personal loans compared to 13% of non-BNPL consumers. Thirty-three percent of BNPL borrowers said they had student loans compared to 17% of non-BNPL consumers.
BNPL users were more likely to suffer financial distress than non-borrowers and were more likely to use high-interest financial products like overdraft, payday, pawn and auto title loans, the survey said.
"A common misconception of buy now, pay later borrowers is that they lack access to other forms of credit," CFPB Director Rohit Chopra said in a statement. "Our analysis shows that these borrowers are more likely to use other credit products."
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BNPL borrowers also tended to have lower credit scores – the average BNPL borrower scored in the subprime category (580-669), while the credit scoring for non-users averaged as near-prime (670-739), according to the CFPB's report.
Poorer credit ratings are aligned with BNPL users' greater credit utilization rate and a more significant percentage of BNPL borrowers falling delinquent on at least one of their payments by 30 days or longer, the report said.
Subprime-rated borrowers would have faced interest rates between 19% and 23% annually if they had chosen to purchase using a credit card instead of a zero-interest product like BNPL, according to the report.
BNPL providers partner with retailers to allow shoppers to split the cost of their online purchases into multiple installments at checkout. Part of the appeal is that the installment payments, which typically begin within a few weeks of the purchase, are interest-free. However, missed payments can result in late fees and other penalties.
"Lower credit scores lead to higher interest rates on traditional credit products, which makes buy now, pay later loans with no interest an attractive alternative that many borrowers seek," the CFPB said in a statement.
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The CFPB does not currently oversee BNPL providers but has plans to issue guidance or rules that would bring the sector in line with the standards that Congress has already established for credit cards, the agency said in a report released in September.
As part of this review, the agency will also ensure that BNPL lenders, like credit card companies, are subject to appropriate supervisory examinations.
BNPL firms typically don't report to credit bureaus, making them a relatively accessible option for consumers. The CFPB is concerned that the ease of access to this financing product could leave consumers at risk of quickly becoming overextended and may drive them deeper into debt.
"Since buy now, pay later is like other forms of credit, we are working to ensure that borrowers have similar protections and that companies play by similar rules," Chopra said.
If you are looking for alternative forms of credit to help fund a large purchase, you could consider using a personal loan. Visit Credible to find your personalized interest rate today.
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