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As consumers gear up for holiday shopping this year, especially young consumers and low-income consumers who don’t have ready access to traditional credit, they are looking to buy gifts later. There is a possibility to avail a “pay” loan.

However, financial experts warn shoppers to be aware of the hidden financial risks associated with these popular loans. If you’ve ever bought clothes, furniture, sneakers, or concert tickets online, you’ve probably seen the option to split and split costs at checkout.companies like deferred payment, agree with, Klarna When PayPal Both offer services, and Apple plans to enter the market later this year.

But as economic instability increases, so do delinquencies. September report release Consumer Risk by the Consumer Financial Protection Bureau (CFPB) is a market that is largely unregulated and lacks many of the same protections offered by other forms of credit loans. reveals the consumer risks associated with Pay Later (BNPL) plans.

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Annie Millerbernd, personal loan expert at NerdWallet, said in an email. “Her recent NerdWallet survey found that consumers who used BNPL in the last year did so an average of six times.”

According to experts, managing multiple BNPL loans can be difficult. Millerbernd recommends using BNPL at one of his gift or one of his retail outlets and paying off that loan before purchasing another gift.

Also, shoppers who take out BNPL loans typically spend 10% to 40% more when paying with these loans than they would with a credit card. according to In new research by researchers at Harvard Business School. Loans divide the purchase into smaller installments, so shoppers can be tempted to buy big-ticket items.

Here’s what you should know about the BNPL plan before you accept it.

How does “Buy now, pay later” work?

Branded as ‘interest-free loans’, the buy now pay later service requires you to download the app, link your bank account or debit or credit card, and sign up for weekly or monthly installments. Some companies, such as Klarna and Afterpay, conduct soft credit checks that are not reported to credit bureaus before approving borrowers. Most are approved within minutes. Scheduled payments are automatically deducted from your account or charged to your card.

Services generally do not charge more than you paid up front. So technically it’s interest free as long as you pay it on time.

However, late payments may be subject to a flat fee or fees calculated as a percentage of the total outstanding amount. These can go as high as $34 plus interest. Missing multiple payments may prevent you from using the service in the future, and delinquencies can hurt your credit score.

Are my purchases protected?

In the United States, the buy now pay later service is not currently covered by the Lending Law Truth that regulates credit cards and other types of loans (4 or more installments).

This means that it can be difficult to resolve disputes with sellers, return goods, and refund in case of fraud. Companies can provide protection, but it is not required.

Lauren Saunders, associate director of the National Consumer Law Center, advises borrowers to avoid linking credit cards to buy now and pay later for apps whenever possible. If you do, you lose the protection you get from using your credit card and you end up paying interest to your card company.

“Use your credit card directly and get those protections,” she said. “Otherwise, it’s the worst of both worlds.”

What are the other risks?

With no centralized buy-now-pay-later reporting, these liabilities don’t always show up in the credit profiles of the major credit rating agencies.

This means lenders don’t know how many loans you’ve set up with other companies, so even if you can’t afford it, more companies may be able to buy more items.

Timely payments are not reported to credit rating agencies, but non-payments are.

“Buying now and paying later generally doesn’t help build credit, but it can hurt,” Sanders said.

Elyse Hicks, consumer policy adviser at the progressive nonprofit Americans for Financial Reform, said people may not be taking themselves seriously enough about whether they can afford to continue to pay. says.

“Because of inflation, people may think, ‘I’m going to have to get what I need and pay for these installments later.’ of?”

Why do retailers offer BNPL loans?

Retailers accept back-end fees for buy-now-pay-later services because products increase cart size. When shoppers are given the option to pay in installments, they are more likely to purchase more items at once.

When Apple recently announced it was creating its own “buy now, pay later” service, Josiah Herndon, 23, tweeted, “I can’t pay with Apple, Klarna, Afterpay, or PayPal Pay in ), joked about paying off six carts. 4, Shop Pay in 4, and Affirm. ”


U.S. Household Debt Soars

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Herndon, who works in insurance in Indianapolis, said he started using the service because he was older and didn’t have a great credit history, which slowed credit card approvals. He has used them ever since to pay for expensive clothes, shoes and other luxury items. We called the option “extremely useful.”

Who Should Use the Buy Now Pay Later Method?

A buy now, pay later loan is a relatively sound, interest-free consumer credit if you have the ability to make all payments on time.

“If[the loan]works as promised, people can avoid late fees, and they can manage their finances, they have a place,” said Sanders of the National Consumer Law Center.

But if you want to improve your credit score and can pay your bills on time, a credit card is a better option. The same is true if you want strong legal protection from fraud and clear, centralized loan reporting.

If you’re not sure you can make your payment on time, buy now, pay later and see if the fees charged by your company are higher than the penalties and interest charged by your credit card company or other lenders. Please consider

How does economic instability affect your ability to buy now and pay later?

As cost of living risessome shoppers are starting to split payments for essentials as well as big-ticket items like electronics and designer clothes. Financial advisors are sounding alarm bells when they find that 15% of customers use the service for everyday purchases like groceries and gas.

Hicks points out that the rise in delinquencies indicates that “buy now, pay later” behavior may already be leading to unmanageable debt for consumers. His July report from Fitch’s rating agency showed app delinquency rates rising sharply in the 12 months to March 31, reaching 4.1% for Afterpay and credit card delinquency rates falling below his It remained relatively stable at 1.4%.

“This growing popularity is going to be interesting to watch in these different economic waves,” Hicks said. “The immediate impact is what’s happening now.”

The Associated Press receives support from the Charles Schwab Foundation for educational and descriptive reports to improve financial literacy. This independent foundation is separate from Charles Schwab and Co. Inc.

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Written by Natalia Chi

Chicago Popular; Chicago breaking news, weather and live video. Covering local politics, health, traffic and sports for Chicago, the suburbs and northwest Indiana.

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