Does BNPL Help or Hurt Low-Income Families

Low-income families are using BNPL services more and more, however, is this helping or hurting these families in the long run?

(Image credit: thefinanser.com)

Struggling, low-income families are being targeted by credit firms offering “buy now, pay later” deals on various products and services. Shoppers are urged to spread out their payments over 4 or 5 separate payments as a solution to the paycheck to paycheck lifestyle many low-income families are forced to live in.

Known as Buy Now, Pay Later, or BNPL, this type of instant, no-cost financing has become increasingly popular during the COVID-19 pandemic. Consumers use it to stretch out payments for necessities, while others are buying big-ticket items without having to put down the full amount. These short-term loans are also popular with consumers who can't qualify for a credit card or other financing but would still like to enjoy the advantage of spreading out payments.

There are risks present, however. Depending on your payment plan, you may be subject to fees and interest charges if payments aren’t made on time. You also may have trouble getting a refund for something you’ve purchased, even if it's defective or unsatisfactory. Lastly, there's the danger of getting carried away and buying much more than you can afford.

“Consumers don’t always understand how these loan programs work, or what help they can expect if something goes wrong,” says Chuck Bell, a program director with the advocacy division of Consumer Reports.

More than 40 percent of American shoppers have used a buy-now-pay-later plan, according to a recent Credit Karma/Qualtrics survey, with the highest usage among Gen Z and younger millennials. Of those who participated in a BNPL program last year, 27 percent were aged 19 to 25, while 48 percent were 26 to 34, according to Cardify.ai, a firm that tracks consumer spending data.

Participation grew during the pandemic, which hit the incomes of many American families and drove more shoppers online than ever before. In a survey last year by Cardify.ai, nearly half of BNPL shoppers said they increased their spending between 10 percent to over 40 percent when using these plans compared with using a credit card. Two-thirds of BNPL customers said they were buying expensive “want” items they might not have otherwise purchased or needed.

The most prominent players in the buy now, pay later sector have focused on partnership deals with retailers selling fashion and household items, while others are promoting credit on groceries, fast food, and drinks, which can leave low-income families vulnerable to impulsive purchases.

Consumers may also find that installment payments are harder to track. A study last year by Cornerstone Advisors, a banking consulting firm in Scottsdale, Ariz., found that over the past two years, 43 percent of those who used BNPL services were late with a payment. Of those, two-thirds said the reason for falling behind was that they simply lost track of the payments, not because they did not have the money.

“For most people having the money was not the problem—it was the management piece of it,” says Ron Shevlin, director of research at Cornerstone Advisors.

You may also face challenges if you have a problem with your purchase, such as obtaining a refund for a product that didn’t arrive or turned out to be defective. Unlike credit card issuers, who are subject to strong federal regulation, short-term lending programs are relatively new and receive minimal, inconsistent oversight from federal and state bank regulators. While the sector is still relatively new with new regulations, welfare groups are already labeling the new form of credit as a “runaway train” for low-income families that is hard to control.

“Buy now pay later programs fall into a regulatory gray area and do not have the same consumer protections as credit cards,” says Chuck Bell, the Consumer Reports advocate.

Unlike credit card issuers, who typically stop payments when a transaction is disputed, BNPL lenders generally require consumers to first contact the merchant to get credit for a return or refund. Until the lender is notified by the retailer that the transaction has been voided or a refund issued, you may have to continue to make payments on your loan. This often leaves consumers on their own to ensure that the merchant follows through and the payment is credited by the BNPL lender. These tasks can be challenging, especially during a pandemic.

To top it all off, credit reporting agencies have begun to develop formal processes for BNPL companies to report short-term loan data to be included in their credit reports. While BNPL providers are not required to report data to credit bureaus, Equifax says it anticipates that its new policy will encourage more to do so. The company plans to begin implementing that process at the end of February. Experian, another credit reporting agency, says it has worked with BNPL providers since 2016 and is in the process of adding more data to credit reports “in a way that will ensure the responsible use of BNPL products does not negatively impact consumer credit scores.”

However, younger consumers with minimal credit scores have fewer opportunities and less time to build a solid credit history. They, in turn, have alot to gain by using BNPL systems the correct way. Building up a track record of on-time payments is one of the best ways to bolster your credit score, and short-term BNPL loans allow consumers who might not have access to other forms of credit a way to establish this good history.

The important part is to always be careful as it is still possible to rack up significant fees and interest charges if you don’t pay off your balances on time. The Consumer Financial Protection Bureau announced a probe into five major BNPL companies, prompted by concerns that the services are allowing consumers to accrue too much debt. With credit bureaus on their way to tracking BNPL data, the risks for your personal credit score are even higher. If your BNPL provider reports a late payment to credit bureaus, your credit score may take a hit. This means a misstep with a BNPL payment plan could have a ripple effect that could set back your credit score back for years to come.