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Buy Now Pay Later (BNPL): What Consumers Need to Know

Buy Now Pay Later (BNPL): What Consumers Need to Know

Buy Now Pay Later (BNPL) loans are popular right now for both consumers and lenders. But are they a good deal for consumers and a gravy train for investors? BNPL loans are most often point-of-sale term loans that permit a borrower to purchase something now, avoid monthly payments for a fixed term, and pay off the purchase by the end of the term. Buy Now Pay Later (BNPL) loans are often easier to obtain than credit cards and underwriting is less strict. Often, BNPL loans offer zero percent or very low-interest rates. And usually, there is another interest rate that is disclosed but often ignored by consumers.  This rate is applied to the loan if it is not paid off on time. Sometimes this rate is quite high.  If the loan is not paid off by the end of the term, all accrued interest is added to the loan balance.

A recent survey found that 56% of Americans have made a purchase with a Buy Now Pay Later loan that they could not pay off within the term. 

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From a borrower’s point of view, BNPL loans can be a great deal.  If the loan is offered at zero percent, the borrower can, theoretically, earn interest on money not spent upfront on the purchase. But, if the borrower doesn’t really have the money for the purchase and doesn’t make payments that amortize the loan, the amount due at the end of the term can be a shock and unaffordable. In addition, consumers who qualify for a credit card should carefully consider the points or cash back that are available through credit card usage.  In most cases, the points or cash back will be more valuable than the interest that could be earned by using a BNPL loan.  Individuals who do not pay off the BNPL loan by the end of the term will find that BNPL loans are expensive and negatively impact credit scores and history.

From the lenders’ point of view, BNPL loan portfolios must turn a profit.  There are two primary ways that BNPL portfolios can be profitable. 

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First is interest income. To earn enough interest, lenders must be confident that a percentage of borrowers will not pay off during the term. The lender must also be confident that a significant portion of non-payers can be persuaded to pay both the balance of the loan and the added interest. The second way of earning a profit on a BNPL portfolio is through transaction fees. BNPL loans may come with an origination fee, late fees, and insufficient fund fees.  

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These two pathways to profitability for BNPL loans are virtually the same as for credit card lenders. A credit card lender must either have a relatively large percentage of borrowers that revolve their balances and/or they must charge fees.  

BNPL loans, in certain circumstances, can be a good deal for individuals who don’t qualify for rewards-earning credit cards and individuals who are short on cash now but will have cash later.  BNPL loans aren’t a panacea of profitability for lenders or investors. Key metrics are difficult to model, and BNPL loans can be fraught with regulatory concerns over transparency and disclosures. The CFPB, under the current administration, will focus on BNPL loans and whether consumers have enough information to make informed decisions. Lenders must earn a return but must also ensure that consumers understand how that is achieved.

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