Buy Now, Pay Later can seem like a shopper’s dream.  Something you want but can’t afford can easily be purchased using credit products like Affirm, Afterpay or Klarna.  Your payments are spread out from weeks to months, typically four payments over six weeks.  You can select when and how you pay it off.  Sounds good right? Not so fast.

A closer look at these products reveals they often have hidden costs and risks, including late fees, increased credit card interest and increased overdraft fees. What happens if you don’t make your payment on time? What happens if you don’t receive the item or service you purchased?

“The market for these products is exploding. This explosive growth makes careful scrutiny of the product and its impacts imperative,” said Center for Responsible Lending senior policy and litigation counsel Nadine Chabrier in a video presentation in November.  “Estimates of growth over the past two years range from 200 percent to 350 percent already.  A third of U.S. adults have reported to using Buy Now, Pay Later,” she said.

“The Financial Health Network found that 24 percent of financially vulnerable adults reported challenges making payments. A recent large-scale study looking at data of over 10 million Buy Now, Pay Later users shows a decline in their financial health. After adoption, users experienced increased overdraft fees, credit card interest, and late fees. They also experience total spending increases consistent with the Buy Now, Pay Later design, which encourages consumers to spend more.”


Ms. Chabrier explained that the concerns around Buy Now, Pay Later include the lack of assessment of the borrower’s ability to repay given their financial obligations. Loans are approved for consumers who may not be able to afford them. Further, the lack of transparency about fees makes it difficult to compare costs.  

“Consumers might find themselves charged twice, once by the seller and by their bank for overdrafts if they’re using their debit card for purchases. In turn, overdraft and NSF (Non-Sufficient Funds) fees can lead to the closure of bank accounts and other lasting negative consequences,” she said.  “Losing access to mainstream banking is a hardship for families that can last for years while a Buy Now, Pay Later provider’s initial soft credit inquiry may not affect a consumer’s credit.”

Falling behind on Buy Now, Pay Later loans also has the potential to hurt credit scores, she added. “The refund and return rights vary from one Buy Now, Pay Later provider to another, and information is often hard for consumers to decipher. By Now, Pay Later often does not come with the return and fraud protections of credit cards, so consumers may end up with no merchandise and money still being taken down of their accounts for credit cards,” Ms. Chabrier noted.

According to industry reports, the Center for Responsible Lending found that Millennials (approximately ages 23-38) and Generation Z (approximately ages 9-22) are the primary generations that utilize Buy Now, Pay Later. It is particularly important that Buy Now, Pay Later have sufficient protections since younger consumers may have little experience in using credit.

The Consumer Financial Protection Bureau Director Rohit Chopra spoke recently about their report on Buy Now, Pay Later products. “We’re already seeing deterioration in credit performance on Buy Now, Pay Later loans. In 2020, 2.9 percent of borrowers in our dataset ‘charged off’(debt unlikely to be collected) on a Buy Now, Pay Later loan, which jumped to 3.8 percent in 2021. And public filings show that this upwards trend is continuing through the first half of 2022.”

The Better Business Bureau has received numerous complaints from customers about difficulty initiating disputes, delays in receiving refunds, and continued demand for payment during the dispute process.

Tammy L. reported this to the Better Business Bureau about Affirm, on December 14:  “Two loans were taken out in my name totaling *******. I called them about the first one and they said it would be 3-5 days before they could do anything. Two hours later a second one went through and this one withdrew a deposit of ******* from my checking account!! They again told me 3-5 days and there was nothing they could do until then. I went to my bank and filed a police report against them for identity theft. Don’t use them ever!”

The Center for Responsible Lending wants consumers to have financial protections with Buy Now, Pay Later products. The group believes Buy Now, Pay Later products should adhere to many of the regulations in place for credit cards. For example, under the Truth in Lending Act and the Credit Card Accountability and Disclosure Act, the Buy Now, Pay Later lenders would need to comply with certain protections around fee disclosures, periodic statements, dispute/chargeback rights, reasonable penalty fees, and underwriting documenting the borrower’s ability to repay.—Nisa Islam Muhammad, Staff Writer