The latest big news in consumer credit is âBuy now, pay laterâ.
Merchants who sign up for this program allow a customer to come out with any merchandise they want after making a modest down payment (25%) and promising to pay the balance, interest-free, in four installments. Credit checks are minimal or even nonexistent, so people whose credit scores are in the tank can participate.
Merchants pay companies that support these programs a fee of 3% to 6% of the purchase price, slightly higher than what they pay as a swipe fee for credit or debit card transactions. Merchants like to buy now, pay later because, well, people spend more when they don’t have to pay right away. (Personal finance rule # 1: never pay today what you can pay tomorrow.)
However, the US Consumer Financial Protection Bureau has serious concerns about buying now, paying later. According to the CFPB, these programs invite those who can least afford it to overspend and fall into the debt trap.
In addition, the CFPB believes that these programs constitute a circumvention of consumer laws that have been in place for many years aimed at providing consumers with information on the cost of credit, and placing the risk of fraud and an obligation to promptly correct them. billing errors on credit and debit card issuers.
At the top of the list of these long-standing consumer credit protection laws is the Truth In Lending Act. This law was promulgated in 1968 and obliges the originators of consumer credit, that is to say loans for personal, family or household purposes, to disclose certain information (in particular an annual percentage and a total of financial charges) using a uniform format and a detailed set of rules.
An important provision of the Truth In Lending Act is the definition of âfinance charge,â which is any amount paid as part of a consumer transaction that would not be paid if the transaction did not involve credit. For example, merchants cannot charge more for goods purchased on credit than for goods purchased in cash. There, the price difference is a financial burden and brings down all the fury of the Truth In Lending Act upon the merchant.
By law, a consumer transaction includes not only those involving finance charges, but also transactions without finance charges that are refunded in more than four installments (which, by the way, is the reason why buy now, pay later, plans cap at four installments).
The CFPB is also concerned about the data mining that continues with the buy-now, pay-after programs. The buyer information captured in these transactions lends itself well to being packaged and sold to third parties who can use it for marketing and other questionable and largely unregulated purposes.
Congress created the CFPB to “monitor consumer financial markets” and the agency claims the power to “require market participants to submit information to inform such monitoring.”
CFPB recently asked five companies offering buy-now, pay-after programs – Affirm, Afterpay, Klarna, PayPal and Zip – to provide detailed information on how their programs work. The CFPB will use this information to determine how the rapidly growing Buy It Now Pay On Pay industry should be regulated.
In the meantime, this remains a world of cautious buyers – there is no free lunch.
Jim Flynn works for Flynn & Wright LLC of Colorado Springs. Email him at [email protected]
Jim Flynn works for Flynn & Wright LLC of Colorado Springs. Contact him at [email protected]