Payment history is not reported very often
BNPLs generally do not inform credit companies when consumers use these loans. This makes it difficult for the lender to know how many loans the consumer owes.
“It makes a huge difference in terms of how much you have to loan,” said Kenneth Lane, CEO of fintech Credit Karma. “Often, the credit system is actually blind to how much you owe in the buy now and pay later scenario.”
Consumers with multiple BNPL loans with multiple payment histories may find themselves in a debt spiral. “That’s when people get into deep trouble,” Lynn said.
It is difficult to build a credit history
“When it comes to your credit, it’s all downside and there’s no upside,” said Matt Schulze, senior credit analyst at LendingTree.
Since BNPLs generally don’t report a positive payment history, “that’s really risky because you’re not able to build up your credit and show the banks that you’re creditworthy,” he added. “On the other hand, if you get it wrong, that error will be logged more often and that can have a negative impact on your credit.”
About 35% of consumers said they would at least consider using buy now, and pay off the loan later last month, according to Lending Tree. Another survey found that 42% of BNPL users said they had paid late on one of these loans.
The effect of late payments varies
chrisanabung detravate | moment | Getty Images
Experts say BNPL lenders may handle late payments differently.
For some, you end up getting hit with fees. For others, said Schulze, they deny you service in the future and will not lend you again. Some companies will report late payments to credit rating companies, while others will not.
Meanwhile, the Consumer Financial Protection Bureau has opened an investigation into how BNPL lenders used and reported consumer data. “The problem is that when they use buy now, they pay later for more and more expenses, including groceries and other in-store purchases, they can accumulate a lot of debt,” CFPB Director Rohit Chopra said in an interview with CNBC.
“The key part is making sure we don’t create a system… that sends people into a downward spiral of debt that they eventually can’t pay.”
Participation: Money 101 is an 8-week educational course on financial freedom, delivered weekly to your inbox. For the Spanish version of Dinero 101, click here.
paying off: 74-year-old retiree is now a model: ‘You don’t have to fade into the background’ with Acorns + CNBC
Disclosure: NBCUniversal and Comcast Ventures are Investors in oak tree fruit.