Although marketed without fees or interest, some buy-now-pay-later products include these charges, but it can be difficult for consumers to know what they’re getting into.
That’s according to new research from Consumer Reports, which looked at the lending, privacy and consumer protection policies of major companies. The study found that buy-now, pay-later service providers did not always have clear disclosure of late fees and interest, and the authors noted that it can be confusing for borrowers to determine what these charges and which ones don’t
“Consumers may not fully understand their obligations,” the authors wrote. “A consumer might, for example, intend to choose a four-payment zero-interest loan option, but decide that six payments is more appropriate, not realizing that the six-payment plan is subject to interest.”
Buy Now Pay Later (known in the payments industry as BNPL) is a new twist on the layaway concept. It allows consumers to receive their purchase immediately, but split their payment into installments paid over a longer period with little or no interest, as long as they make the payments on time. Common BNPL options include Afterpay, Klarna, Affirm
and PayPal PYPL,
Typically, BNPL’s payments last for six weeks, but some providers also offer longer loan products for larger dollar amounts.
Read also: More “buy now, pay later” users see their credit scores drop after missing payments. But are these two things really connected?
Consumers may have difficulty keeping track of the total amounts owed to BNPL lenders, Delicia Hand, director of financial fairness advocacy at Consumer Reports, told MarketWatch.
“This is a transaction-by-transaction payment and credit product, so apparently you could be using five or six buy-now-pay-later products or 50 different transactions. This is a significant change in how consumers get some credit-like thing and they use it,” Hand said.
“It’s kind of a recipe for disaster if it’s not managed carefully,” he added, noting that the transaction-by-transaction nature of buy now, pay later can complicate things for consumers who are already juggling multiple bank and credit card accounts.
Almost all BNPL suppliers have more than one product offering: a short-term one that can be paid over several weeks and a longer-term one that can be paid over several months. The authors of Consumers Reports said that the distinction between short-term plans (the most common are “quad payment” plans that spread out four payments over six weeks) and long-term plans (such as monthly payment plans which can be extended). more than six months or more) can be confusing to consumers, even when placed side by side.
“The exact terms of BNPL are also not always clear and can seem complicated as to when exactly you can be charged interest or a fee and how it will work,” said one participant in the report. “It would have been nice if the exact details were more clearly stated as you go through the registration process because to me it felt like they were holding their cards close and not making it obvious that they were trying to take advantage of someone which no. know exactly what they were getting into.”
Here are details about popular plans of some BPNL companies.
PayPal’s monthly payment plan can be extended for six, 12, or 24 months, with an APR ranging from 9.99% to 29.99%, depending in part on your credit history. an individual and their PayPal transaction history. The borrower can see three different APRs depending on the length of the variable loan when making the purchase. Some merchants may offer a 0% promotional APR, based on information provided by PayPal.
Afferm’s monthly product also charges interest, with APRs ranging, depending on the applicant’s credit, from 0% to 36%, depending on the amount and duration of the loan. The monthly payment plan can be extended up to 60 months. A spokesperson for Affirm said the company makes sure its payment process over time doesn’t have any late or hidden fees other than what consumers see at checkout.
“This includes underwriting every transaction before extending credit, giving consumers control over their privacy choices and providing consistent and transparent disclosures at checkout,” the spokesperson told MarketWatch via email.
Klarna offers similar options, with a four-payment plan, an interest-free plan that pays off within 30 days, and longer interest-bearing financing options of up to 24 months, with APRs ranging from 0 and 29.99%.
According to its website, Klarna’s pay-in-four product does not charge interest, but will charge a late fee of up to $7 if a customer is 10 days late making a payment. The borrower’s financial institution may also charge interest or fees. Klarna immediately restricts the use of its services to users who miss a payment.
Some recently added long-term financing options were not included in Consumer Report’s research. These include Afterpay options of up to 12 months and Sezzle’s long-term monthly plans for larger purchases. Sezzle told MarketWatch that it also offers full-pay and two-pay products, which work similarly to the four-pay product, which the report does include.
If a customer is late making an installment payment, Sezzle offers a grace period before restricting a user from making additional purchases, the company told MarketWatch. A user who misses a payment must pay a reactivation fee to use Sezzle in the future, Consumer Reports noted.
Afterpay charges a fixed late fee for its four payment option. The Consumer Reports team found that late fees “do not appear to be a significant portion of their revenue.”
Afterpay did not respond to a request for comment from MarketWatch.
Zilch offers a pay-in-four option with no late or hidden fees, and also has a pay-it-all option now that gives customers 2% cash back. Both types of payments must go through Zilch’s virtual card. Online payments made with the company’s Mastercard could incur fees, the Consumer Reports authors noted, as its “business model is unclear.”
The commission Zilch receives from merchants when a consumer makes a purchase is passed on to consumers, and a Zilch spokesperson told MarketWatch that while the model is unique, “there’s nothing unclear about it.”
“We pass a portion of this commission on to our customers in the form of free credit, savings, offers and discounts,” the spokesperson said in an email.
With Perpay, payments come directly from a user’s paycheck. The company charges both late fees and interest, according to Consumer Reports, although Perpay says on its website that it will not charge “any additional fees as a result of missed or late payments.” Perpay also offers a digital card.
Perpay did not respond to a request for comment from MarketWatch.
Zip only offers one payment option, a payment plan in four. If a user does not pay the minimum total payment in full by the deadline, the Company will charge a late fee of up to $7. It will also charge interest.
Zip did not respond to a request for comment from MarketWatch.