Buy Now, Pay Later plans can increase consumer and credit card debt

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The Afterpay logo is displayed on the smartphone.

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As the “buy now, pay later” option becomes increasingly popular, analysts warn of the risk of default due to the lack of “opaque” credit checks and debt reports.

Without checking the consumer’s credit history, lenders could underestimate the borrower’s debt level when assessing new loan applications, they said. Analysts have warned consumers are also at risk of choking off more credit card debt to pay off their “buy now, pay later” (BNPL) obligations.

BNPL providers typically partner with both online and in-store retailers to provide consumers with the option of paying in installments, including benefits with no late fees and often high loan limits.

These payment options are increasingly popular, especially among young consumers of online shopping, and more and more companies have started offering services in recent years.

These companies do not do any sort of credit bureau on these individuals… during a recession, they can buy first now and not pay later.

Stephen big gar

Argus Research Director of Research Financial Institutions

Default risk

In a recent report, Fitch Ratings said the industry debt performance report was “opaque.” Many of these providers have not reported their use of these services to the credit bureau, the rating provider said.

“As a result, BNPL debt often does not appear on credit reports, and borrowers may try to obtain BNPL credits from multiple providers,” Fitch analysts write. “Lenders (including non-BNPLs) may underestimate the borrower’s level of debt when taking on new debt.”

Stephen Biggar, director of financial institutions research at Argus Research, warned that default is “one of the major risks.”

“These companies don’t do any kind of credit bureau on these people,” he told CNBC’s “SquawkBox Asia” last week. “During the recession, they can buy first now and not pay later.”

“Buy now, pay later” mechanism

Traditionally, installment plans have been available in stores for decades. However, it was typically used in high value items for thousands of dollars, such as furniture, electronics, and household appliances.

The latest “Buy Now, Pay Later” plan covers the segment between credit card plans and installment plans. Focusing on young tech-savvy users, they are offered for online purchases as low as $ 10 to $ 20, or up to thousands of dollars.

One of the more popular providers is Affirm, a US-based payment time company. The maximum value you can get with a one-time payment plan using Affirm is $ 17,500.

Many of these fintech apps offer treats not found on traditional credit cards or installment plans. There may be no late fees, low or no interest, high loan restrictions, and no credit checks required. Conditions vary depending on the provider.

Conversely, if consumers do not read the terms carefully, the cost of borrowing can skyrocket.

The fine print has potential pitfalls. Additional fees, such as additional fees for rescheduling payments, and some providers charge high late fees.

Analysts have also cautioned against the trend towards voluntary purchases given the straightforward application process and lower borrowing costs than credit cards.

According to Fitch, the increase in online shopping during the pandemic has led to an increase in the use of these payment options.

In the United States, those short-term installment loans grew 215% year-on-year in the first two months of the year, according to data from Adobe Analytics. Consumers using these services placed 18% more orders than during the same period in 2020.

According to Fitch, ecommerce payments in the United States made using BNPL reached $ 19 billion last year, more than double the $ 9.5 billion spent in 2019.

BNPL users may find that they cannot afford to make regular repayments and can use credit cards or other forms of high interest debt to pay off their BNPL debt.

Vendors that have emerged in this segment include Affirm, Quadpay, and Klarna.

PayPal, Mastercard, American Express, Citi, and JP Morgan Chase all offer similar loan products, but Apple is reportedly trying to offer such services.

Credit card debt can skyrocket

Fitch warned that such “buy now, pay later” debt could increase and even extend to credit card debt.

“BNPL users may find that they cannot afford to make regular repayments and can rely on credit cards or other forms of high interest debt to pay off their BNPL debt,” he said. he declares.

According to the Federal Reserve Board, US household debt rose to the highest dollar during the 14 years of the second quarter. This was mainly due to the boom in the housing market, but credit card balances also increased by $ 17 billion from the first quarter to a total of $ 778 billion.

According to Fitch, a November study by the Australian Securities and Investments Commission found that 15% of Australian consumers using such a postpaid program added in the previous year to pay for their BNPL plan on time. I had to take out a loan.

In England Fitch A major UK bank reported that of more than 660,000 customers who paid BNPL providers, 10% were over their overdraft limits. In the same month.

Biggar of Argus Research told CNBC last quarter that Square’s business losses had “increased significantly.”

According to Square’s 2019 annual report, bad debt transactions and losses for the year ending December 31, 2019 were up 44% from the previous year.

Regarding the risk that consumers will not pay, he said:

In comparison, credit cards have built-in “security” features such as blocking access to the card, he said.

– CNBC’s Jeff Cox contributed to this report.

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