Buy Now, Pay Later Programs Pose Big Risks to Borrowers

Many have found an increase in new “Buy Now, Pay Later” options on virtually all e-commerce sites to be convenient and helpful following rising prices due to inflation and a still stifled supply chain. by the COVID-19 pandemic. However, a Harvard economist warns that while these options may be tempting, they could also be dangerous for consumers in the long run.

While at the start of the pandemic the option allowed those stuck at home to continue making large purchases despite the closure of physical stores and to be able to spread these payments over time, consumers are now also using the option when they buy more everyday items from Target, Walmart and Amazon, which makes it more problematic now.

“Three years ago people were talking about Peloton bikes, now people are buying sneakers, jeans, socks,” Marshall Lux, a researcher at Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government, told CNBC. .

The problem is mainly that the growth of these programs – offered by Afterpay, Affirm and Klarna – is also driven by younger consumers, making them more vulnerable if they rack up multiple charges using the programs and then suffer some sort of of economic slowdown. .

“These are people who can’t afford to be hurt,” Lux added.

One problem is that according to a LendingTree survey, 70% of users now admit to spending more than they would if they had to pay everything upfront, and 42% who took one of these loans also took one. late payment on one of these loans. This makes them more vulnerable to late fees, deferred interest or other penalties, which could also lead to problems on a credit report if a credit check is performed — consequences that could have a major impact on future loans and purchases.

“They’re not coming for your sneakers, the fact that you can buy something and now know what happens if you don’t pay – for the average person who works paycheck to paycheck, it becomes a problem,” Lux said. “Seems a bit Wild West-y to me.”

Photo: photo of the campaign creators on Unsplash

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