More Consumers are Using Buy Now, Pay Later (VIDEO)
Consumer protection advocates fear that buy-it-now and pay-on-pay products are innovative debt traps.
It’s finals week at the University of California Los Angeles.
Akunnia Akubuilo, a junior political science graduate, took the time out of her studies to show Newsy the app she says she uses to do most of her online shopping – Klarna.
âI actually bought a lot of things for my dorm, like my mini-fridge, which cost around $ 200, which I bought with Klarna,â she said. “I have LSAT prep books because I plan to take LSAT in April.”
Using apps to buy things is nothing new. At UCLA, you can use your phone to get an autonomous robot to deliver pizza.
But Klarna is one of the many later paid-for-buy apps that are growing in popularity, especially among young people.
The apps let you buy and pay for items – online or in-store – interest-free, in weekly or monthly installments.
âYou open the app and you can immediately see your purchasing power,â Akubuilo said.
But what they often don’t see is how quickly, across multiple apps, their debt is building up.
Gen Z are turning to buy now and pay later than their older counterparts.
This year, nearly two in three young people between the ages of 18 and 24 said they had used these apps. Last year it was closer to one in three.
âI noticed that over the summer and early fall it became a lot more available especially when it comes to stores or more like large purchases. I was looking on Expedia and now Expedia is taking Klarna, âAkubuilo said.
In November, a Congressional FinTech task force held hearings focused on the promises and dangers of these emerging products.
“The exponential growth of these alternative financial products is a clear signal that consumers want them,” said Representative Warren Davidson.
The association representing these apps says they help people avoid high interest credit card debt and payday loans, which come with expensive finance charges.
âThey use these products because it gives them certainty. They know exactly when payments are due,â said Penny Lee, CEO of the Financial Technology Association. âSo it gives them that consistency to be able to budget better on their own. “
But consumer protection advocates fear that buy-it-now and pay-on-payment products are innovative debt traps. Lauren Saunders is Associate Director of the National Consumer Law Center.
âRefunds can be difficult to come by,â she said. âMultiple loans can be difficult to manage and can lead to unaffordable debt. Abusive profit models can be built on late fees from struggling consumers. “
âMost of the time you’re broke and you want to buy stuff,â Akubuilo said. “It can kind of encourage you to live beyond your means, like, you know sometimes you just can’t help yourself. I know I can’t. I love shopping, so I love it. use Klarna and I hope and pray that I have the money to pay for it later. “
Credit Karma recently discovered that more than half of Gen Z and Millennials report missing at least one payment. And that can lead to penalties of up to 25%.
âLet’s say you don’t have enough money to balance your account and the payment fails, then you have to pay late fees,â Akubuilo said. “It’s really tragic. Like sometimes, the late charge equates to one of the payments you might have to make.”
However, you can use multiple Buy Now, Pay Later apps at the same time, which means you may have a number of payments due.
âI went through this,â Akubuilo said. âIt’ll be like a text that says, ‘Oh, you’ve got a $ 12 payment coming up. “Then the next day it will be like, ‘Oh, $ 16.'”
Newsy spoke to Adam Wright, senior counsel for the California Department of Financial Protection and Innovation, about the potential consequences of using these apps.
âThere is definitely concern that people are piling up these products and getting more than they can repay when they get these products,â Wright said. âWith many of these products, you pre-authorize payments made to your account. Is not it ? And if the suppliers do nothing to make sure that consumers are actually able to afford them, then you might have the possibility that by buying something online, you are going to get their payment out of your account before you. don’t need to, say, pay rent. ”
California is the first state in the country to regulate buy now, play later. It requires companies to be licensed as loan providers.
âBefore we did, in California – and in many states – these products weren’t regulated at all. They had been structured in such a way as to avoid any regulation by our agency or any federal agencies,â Wright said. The problem is, no one checks to make sure businesses are doing what they’re supposed to do. No one checks to make sure they respond to consumer complaints every time they come in, and no one is monitoring really the backs of consumers.
The specific national regulations for buy now, pay later for apps are nowhere in sight.
âUntil we have a good understanding of these products and their use, we must refrain from implementing overly burdensome regulations that would prevent consumers from enjoying the benefits of the programs,â Davidson said.
But Akubuilo says it’s a good thing these apps exist.
âI say definitely,â she said. âTake them with a grain of salt because sometimes it can feel like a video game or sims – where it’s like you’re spending dummy money. But no, it’s real money. “
Real money that adds to the debt burden incurred, in many cases, by people who already owe a lot.