The Downsides of Using ‘Buy Now, Pay Later’

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:

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.

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