Avoid the Tricks and Traps of Buy Now, Pay Later Loans

When Francisco Chairez, a retiree in Longview, Texas, decided last year to gift himself golf gear, he made the purchase from an online sporting goods reseller that offered a payment plan through Affirm. The seller told him it sent the items, and FedEx says it delivered them. But Chairez says he never received them. The weekly payments were still due, and after contacting the seller, the shipper, and eventually Affirm, he learned he was still on the hook for the payments even though the merchandise was never received. Chairez decided he wouldn’t pay. 

“Everyone else has some protection or insurance—the seller, the shipper, and Affirm,” Chairez says. “I had nothing.” 

An Affirm spokesperson said any returns or refunds are subject to a merchant’s return policy, and that most cases can be resolved directly between the two. And if that doesn’t work, a consumer can reach out to Affirm. “Every aspect of the consumer experience matters at Affirm, and we do our best to support all Affirm consumers throughout their purchasing journey, including assisting with return and refund issues as they arise,” the spokesperson said in a statement to CR.

In CR’s survey, 10 percent of people who have used a buy now, pay later service said they had difficulty getting refunds or stopping payment for items they returned or never received, or trouble adjusting payments after making changes to a purchase. 

Consider this instead. Not everyone has access to a credit card, but those who do can get better protections by using one, says Ed Mierzwinski, senior director of federal programs at the nonprofit U.S. Public Interest Research Group (U.S. PIRG). And that can be especially true for big purchases, such as electronics, appliances, and home furnishings. That’s because those who use credit cards are protected by the Fair Credit Billing Act, which, among other things, provides protections for items that are damaged on delivery or never received at all, he says.

That’s good to know, says Bill Hardekopf, senior industry analyst at Money Crashers: Paying off a buy now, pay later loan with a credit card—something almost a quarter of CR survey respondents said they did—might not offer the same protection as making the initial purchase with one.

What’s the bigger fix? The CFPB should require “charge-back rights” for buy now, pay later loans, which would provide legal rights to dispute billing errors, including nondelivery of merchandise, Bell says. These are currently required for credit cards under the Fair Credit Billing Act but do not apply to buy now, pay later loans.

Eleven percent of people in CR’s survey who used buy now, pay later services missed at least one payment, in some cases because they lost track of when it needed to be paid or didn’t realize the payment was due. Some said they thought they’d set up automatic payments only to find out the payment wasn’t withdrawn automatically. Others thought they’d canceled their purchase and later learned the payments had still gone through.

People who miss buy now, pay later payments can get socked with unexpected penalties, including late fees or interest charges, and the missed payment could appear on their credit report. And 30 percent of people said they did not know about all the possible late fees or interest charges when they first used buy now, pay later services. 

Clint Havlin of Fredericksburg, Va., is one such person. He says he used PayPal’s six-month payment plan twice—once to pay his federal taxes and once to buy computer equipment. He paid off the bill for the taxes on time, but was late by one day on the computer purchase—and was stuck with a $29 fee. “The reason I used it was to avoid interest charges on my credit card,” Havlin says. “But with the late fee, that was at least the amount of interest I would have paid, and probably more.” 

A PayPal spokesperson said the company offers customers several ways to stay informed of upcoming payments, including autopay and payment reminders, and added that “if a consumer has concerns about their ability to repay by the due date, we welcome them to contact us and we will work with them however we can.”

Consider this instead. Set up autopay. One issue for Havlin: He was manually paying off the bill each month. “We were remodeling our home at the time, and I wanted to be in control of when the money was removed from my account, so I could manage the cash flow.” 

Consumer advocates say you should also read the fine print of the loan terms so you aren’t surprised. Some might not charge a late fee, like Affirm and PayPal Pay in 4. Others could charge late fees: Afterpay, for example, charges up to $8, and Zip dings you up to $10.

What’s the bigger fix? Require buy now, pay later companies to clearly state repayment terms and late fees in a standardized fashion, says U.S. PIRG’s Mierzwinski. Specifically, “companies should be required to follow the Truth in Lending Act, which requires disclosure of all the terms and fees,” he says. The problem? That law currently applies to credit cards but not buy now, pay later loans. 

One of the main attractions of buy now, pay later services is how easy and fast it is to get the loans. CR’s Bell says he was able to get a loan for an online purchase of two items totaling $307 from Klarna after just a few clicks and filling out a short page of personal and financial questions.

But that ease may also draw in some people who can’t afford the loans. In CR’s survey, in fact, 45 percent of people who used a buy now, pay later service said they used it because they otherwise couldn’t afford the purchase. That can be a recipe for trouble: Not surprisingly, the biggest reason people say they missed making a payment is that they thought they would have the money but fell short. 

“Consumers are reporting buying more with buy now, pay later than they would otherwise,” says Rachel Gittleman, financial services outreach manager at the Consumer Federation of America. She recently testified before a Congressional committee on these services. “It’s pushing them into larger purchases that they may not have made otherwise.”

And the more such loans people take out, the greater the risk: CR’s survey found that people juggling four or more buy now, pay later loans at once were twice as likely to have missed a payment.

As more and more retailers offer buy now, pay later options, the likelihood of consumers holding multiple loans at a time also grows. In recent years, in fact, the payment plans have become options to use at everything from grocery stores to restaurants, making keeping track of all the loans you might have at one time a possible challenge. 

Consider this instead. If you decide to take out a buy now, pay later loan, try to have no more than one or two at a time. And stick with a single provider, so you are not forced to juggle multiple loans with multiple vendors, says CR’s Bell. That will also help you stick closer to a realistic payment budget, he says.

What’s the bigger fix? Require buy now, pay later services to report all loans to the three big credit bureaus—Equifax, Experian, and TransUnion—in a standardized fashion, Bell says, and require that the lenders base their decisions about whether to extend credit on the person’s full credit history. In addition, the companies should also provide periodic billing statements to their customers, as credit card companies do, to help users track payments coming due. 

Gisela Arias of Jefferson, N.J., used PayPal’s Pay in 4 service to purchase a vacuum from an online store. When the vacuum didn’t work as expected, she returned it—but only after already making two of the four monthly payments. 

PayPal removed the two remaining charges, she says, but getting a refund for the two earlier ones took multiple phone calls over several weeks. That was the last time Arias used the buy now, pay later service. “I’m not doing this again,” she says.

The CFPB says Arias’ situation is a common consumer complaint—refunds that take weeks or longer to obtain, refunds that never arrive, and the question of managing payments while the refund is being processed. 

Another payment option can make the refund process drag on even longer, the CFPB says: using a virtual credit card via the buy now, pay later company’s app. These let you borrow for purchases at stores where buy now, pay later services are not offered. But they don’t offer the same protections as traditional credit cards, and consumers have complained about delays in processing refunds when using them, the CFPB says. 

Consider this instead. Be especially wary of using a buy now, pay later virtual credit card, says CR’s Bell. For fast and easier refunds, stick with a traditional credit card. 

Good to know: For all refunds, once you’ve returned the items, check with the buy now, pay later service to confirm your refund was credited. If it was not, ask if you can have an extension on the loan; it’s possible that the refund will be credited to your loan before the next due date. 

What’s the bigger fix? Bell says the CFPB should set and require adherence to standards that ensure fast, efficient resolution of returns and payment disputes.

One benefit of buy now, pay later loans is that you may be able to apply and be approved for one without it hurting your credit score, as can be the case with many other loans. But late payments could still cause credit damage. CR’s survey found that among people who had at least one late payment, 15 percent said that information was reported on their credit report. And 21 percent said their debt was turned over to a collection agency. “Both of those can lower your credit score, sometimes by a lot,” Bell says. 

In fact, Gittleman, at the Consumer Federation of America, says that one study by FICO showed that credit scores went down among people who had a pay-in-four or buy now, pay later credit item on their report. 

Consider this instead. Notify the companies if you can’t pay on time—you may be able to reschedule a payment for a later date. For example, those using Afterpay’s pay-in-four loan can sometimes reschedule the second or third (but not final) installment through the app or, if that doesn’t work, ask for a “hardship repayment arrangement.” And, for a fee, you can reschedule certain Sezzle payments 48 hours in advance (that’s the recommended time to make sure it goes through) for up to two weeks from the original due date. 

What’s the bigger fix? There should be industrywide standards for reporting buy now, pay later loans to the three big credit bureaus that fairly reflect a borrower’s use of credit, similar to the current standards for credit cards. In addition, those standards should better protect customers from having late buy now, pay later payments related to returns and payment disputes show up in their credit reports. That would boost scores and limit circumstances where they can turn over unpaid debt to collections, says CR’s Bell.