What is Buy Now, Pay Later service? Should I use it?
There are new services coming online to help you finance your purchases, should you try them?
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The ‘buy now, pay later’ trend may be causing a financial crisis, new research has found.
According to one researcher, shoppers who take out short-term loans not only tend to borrow and spend more money, but also have difficulty keeping up with their debt payments. investigation Survey of 2,223 U.S. adults from August 31 to September 3 by business intelligence firm Morning Consult.
The survey found that more than two in five users buy now and pay off their debt later, and a quarter of them missed their last month’s payment. A further quarter said they had paid a late fee. 27% experienced a drop in their credit score and 22% interacted with debt collectors.
“This number could rise even further if personal debt conditions deteriorate, which could be a serious problem for these customers at a time when interest rates are already high,” said Jamie Toplin, financial services analyst at Morning Consult. There is a possibility that problems may arise.”
Who are the buy now, pay later users?
Here’s what Morning Consult found:
◾ Young people: According to Morning Consult, 37% of Gen Z adults and 32% of Millennials said they made a buy now, pay later purchase in August, compared to 16% of Gen X and 6% of Boomers. .
◾ be wealthy: More than one-fifth (21%) of consumers in households with annual incomes between $50,000 and $99,999 have used Buy Now Pay Later in the last month, compared to 28% of households with incomes of at least $100,000. was doing so. The richer you are, the more often you use them.
◾ technology savvy: They have less access to or are dissatisfied with traditional financial institutions, but are attracted to digital banks.
◾ People in debt: They are more likely than the average consumer to live in households with higher overall debt levels, including medical, credit card, auto, student, mortgage, home equity, and personal loans. A third even said they use a credit card to pay for a buy now, pay later loan, and “this can create a vicious cycle that is difficult to overcome,” says Morning Consult. Toplin said.
◾ Starved of trust: Compared to U.S. adults overall, more than twice as many Buy Now and Pay Later users said in August that a member of their household had applied for a new credit card in the past month.
◾ Low credit score: on average, their credit scores are 50 points lower than non-users. Philadelphia Federal Reserve Survey.
How do loans work?
“Buy now, pay later”, primarily offered by fintechs, allows people to purchase goods and services and pay for them interest-free, usually in several equal installments with the first payment at checkout. It is a type of short-term finance that allows you to pay. The most common Buy Now, Pay Later plan allows you to pay off your debt in 6 weeks with 4 equal payments.
“Buy now, pay later” usage is booming because it is relatively easy to get approved, allows customers to buy items now and pay later, and is not reported to credit bureaus.
Companies offering “buy now” and “pay later”: More than 30 popular retailers are offering buy now, pay later this holiday season
However, there are also risks. Loans don’t pay interest, but if you miss a payment, you’ll be charged late fees, which can add up quickly. Consumer Financial Protection Bureau alerted.
Additionally, if the product is defective, fraudulent, or needs to be returned, you may lose the consumer protections you normally get when using a credit card. “Buy now, pay later” behavior is not reported to credit bureaus, making it easy for people to take out loans from different financial institutions at the same time or continue spending and take on more debt. .
The financial health of buy-now-pay-later users could be “on the verge of plummeting” due to a debt snowball, Toplin said.
Last year, the CFPB announced that it planned to: Regulate buy now, pay later companies.
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday to Friday morning.