Buy now, pay later – this is not a boom, but a bubble, says a Harvard employee

Most people like the “buy now, pay later” convenience.

With the onset of the coronavirus pandemic, installment payments have skyrocketed in popularity along with a general surge in online shopping.

Initially, allocating the cost of a large purchase like Peloton made financial sense, especially at a zero rate.

According to Experian, 4 in 5 US consumers use BNPL to buy everything from clothes to cleaning products, and most shoppers say buy now, pay later can replace their traditional payment method (probably credit cards).

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“It’s hard to buy anything now without asking if you want to pay over time,” said Marshall Lux, a fellow at the Mossawar-Rahmani Center for Business and Government at Harvard’s Kennedy School.

These days, most consumers will see a “buy now, pay later” option when shopping online at retailers like Target, Walmart, and Amazon, and many vendors are also introducing browser extensions that you can download and apply to any online store. purchase. Plus, there are apps that let you use installment payments to buy things in person, just like you would use Apple Pay.

“Three years ago people were talking about Peloton bikes, now people are buying sneakers, jeans, socks,” Lux said. “When people start buying household items on credit, it signals a problem.”

When people start buying household items on credit, it signals a problem.

Marshall Lux

Fellow of the Harvard Kennedy School

In addition, BNPL’s rapid growth is driven primarily by younger consumers, with two-thirds of BNPL borrowers considered subprime, Lux notes, making them particularly vulnerable to economic shocks or a possible downturn.

“These are people who cannot afford to get hurt,” he said.

In addition, almost 70% of users who buy now pay later admit to spending more than if they had to pay for everything up front. survey from LendingTree.

In fact, 42% of consumers who took out a buy-now-pay-later loan were late on one of those loans, LendingTree found.

Generation Z is more likely to skip a payment and use BNPL for everyday purchases rather than large purchases, according to a separate study. Poll on Piplsay voting site.

Generally, if you miss a payment, there may be late fees, deferred interest, or other penalties, depending on the lender. (CNBC Select has a full summary of fees, APR, regardless of whether a credit check is performed and whether the supplier reports to credit scoring companies, in which case a late payment could also affect your credit score.)

While “they won’t come for your sneakers, the fact that you can buy something and not know what happens when you don’t meet commitments – for the average person working paycheck to paycheck, that becomes a problem,” Lux said. . “It feels a bit Wild West to me.”

Without much regulatory oversight, the BNPL market currently exists in a “legal gray space,” according to Lux.

“Let’s do a stress test,” he said. “It could become a pretty big bubble.”

The Consumer Financial Protection Bureau has opened an investigation into popular “buy now, pay later” programs.

The Financial Watchdog said he was particularly concerned about how these programs affect consumer debt accumulation, as well as what consumer protection laws apply and how payment providers collect data.

“Buy now, pay later is a new version of the old installment plan, but with modern, faster twists, where the consumer gets the product immediately but is also immediately in debt,” CFPB director Rohit Chopra said in a statement.

The CFPB has yet to announce its next steps.

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