Financial regulators take aim at "buy now, pay later" loans

Millions of Americans have embraced the practice of buying small-ticket items and paying for them in installments, an increasingly popular model among retailers known as "buy now, pay later" loans. But many consumers are struggling with the "pay later" part of the equation.

Although such loans can help consumers purchase goods that they would otherwise struggle to afford, they are largely unregulated and can lead to trouble down the line. To prevent people from getting burned, the federal Consumer Financial Protection Bureau plans to develop rules for buy now, pay later lenders. 

"Buy now, pay later is a rapidly growing type of loan that serves as a close substitute for credit cards," CFPB Director Rohit Chopra said Thursday in a statement. "We will be working to ensure that borrowers have similar protections, regardless of whether they use a credit card or a buy now, pay later loan."

Buy now, pay later loans have surged in popularity along with the rate of U.S. inflation, with some borrowers are using them to purchase staples such as groceries, gas and pet care products. The loans are typically interest-free and range from $50 to $1,000 and are repaid over four installments. Yet while the loans may not carry interest, they are subject to late fees if a borrower misses a payment. 

In 2021, buy now, pay later loans totaled $24 billion, up from $2 billion in 2019, according to a CFPB report. The payment option has become ubiquitous in stores and online, forcing regulators to play catch up. At the same time, the agency has seen a steady rise in the percentage of borrowers who fall behind.

"The regulations have not kept up with financial technology, to be quite frank," Associated Press reporter Ken Sweet told CBS News. 

While the loans are often marketed as a "zero-risk" credit option, regulators note that the loans don't carry the same protections as traditional credit products. Borrowers could also be forced into making automatic payments or be subject to multiple late fees if they miss a single payment. 

"Digital surveillance"

Providers of buy now, pay later loans, such as Affirm, Afterpay and Klarna, could also be collecting and selling consumer data, potentially threatening consumers' privacy, according to the CFPB.

"[W]e find that buy now, pay later firms are building business models dependent on digital surveillance. In some ways, these firms aren't just lenders, they are also advertisers and virtual mall operators," Chopra said. "Because they are deeply embedded as a payment mechanism for e-commerce, buy now, pay later lenders can gather extraordinarily detailed information about your purchase behavior, in a way traditional cards cannot."

Another major concern for regulators: Buy now, pay later loans are designed to encourage consumers to spend — and borrow — more. Meanwhile, lenders don't provide data to the major credit reporting agencies, making it easy for consumers to take out loans they can't afford to repay and rack up debt. 

In other words, buying now and paying later can fuel unhealthy financial habits that seriously threaten consumers' financial wellbeing. 

The CFPB said it is working on rules that will subject buy now, pay later lenders to the same kind of supervision as credit card companies. It is also examining the scope of lenders' data collection and working to develop credit reporting practices that reduce the risk of borrowers accumulating too much debt.