Believe it or not, the beginning of the holiday season is here. As many folks start to look for deals on the perfect present online, one newer way to pay is raising some eyebrows from financial experts and consumer watchdogs alike.
Buy now, pay later options are usually seen at the end of a transaction where you’d input payments. They may sound like a good deal, but investigative reporter Lisa Gill of Consumer Reports says it’s better to think twice.
Gill spoke with Texas Standard on what to watch out for when it comes to these loans, how they can get out of hand, and if you do choose to go that route, which products to avoid using the loan to pay for. Listen to the interview above or read the transcript below.
This transcript has been edited lightly for clarity:
Texas Standard: Buy now, pay later. Isn’t that what credit cards do?
Lisa Gill: Yeah, that’s a good point. In fact, the way that buy now, pay later operates is actually more like layaway – back way before credit cards.
The old the idea that there is a specific item that you wish to purchase and you’re going to pay – typically they call it “pay in 4” – you pay four payments about two weeks/every two weeks. And it’s really exactly like the old-time layaway.
And I guess one of the advantages is you’re not paying interest or are you paying interest?
From a consumer standpoint, there’s a couple of reasons people do it. First off, is if they have credit cards, they might be maxed out. So you don’t want to add to it. So they’ve got some financial vulnerability right there.
The other reason is they might not have credit cards and so they may be relying on things like that and maybe only using a debit card or prepaid card. And so this idea that you can pay into the future for something helps them. And in this case, for small dollar purchases in the “pay in 4” model, they’re not checking your credit.
All right. I’m going to admit I’ve done this. Now that you describe it, I know exactly what this is. But there’s a little catch that I want to talk about and maybe we can talk about where we’re seeing this.
I bought a musical instrument from a company and I thought, “wow, this is really cool.” I can pay in these increments. I don’t have to have it on my credit card for all the reasons you’re talking about. But I noticed that there was a convenience charge added. In other words, they weren’t checking my credit or anything like that, they were just adding a little something on top – about $25. Okay, not terrible.
But where are we seeing this now? Is it just in specific online vendors or are we seeing it at mom-and-pop stores? Where does this happen?
At first, it really started out with online vendors, like your major players – your Walmarts, Amazon…
They’re already all in on this?
They’re all in. And what’s really actually even more confusing is that a consumer has multiple choices among the companies. At the point of purchase, you could pick between Sezzle or Affirm or PayPal. I mean, it’s just like the amount of choice, I find it overwhelming.
Then you have mom-and-pop stores who are trying to, you know, they want to drum up business and it’s another way to attract customers. I would say it’s really everywhere. And it would be surprising to me to not find it somewhere.
Where are the red flags?
If you’re thinking to yourself, “I really don’t want to put it on my card” or “”I can’t get a card, but I can’t afford something,” that’s your first stop.
But a lot of people do not stop there. They want to buy it anyway. And whether it’s maybe holiday time or they want to travel or they want to do something, it’s understandable. They want purchasing power.
But the first, in my mind, red flags… If you can’t pay for it today and you don’t have enough credit for it, you might want to put the brakes on even just the idea of a “pay in 4” model.
Because sort of psychologically you get into this space where it’s like, “well, I’m just paying a little bit for this.”
And a little bit for that, right? So then the next thing that we know happens from there, you’re going to get a second loan and you’re probably going to get a third loan. And so it kind of like metastasizes.
And one of the things that we’ve found is that people are at great risk of missing payments when they start having multiple buy now, pay later loans out there.
I mean, if someone still wants to go this buy now, pay later route, I can certainly see the rationalization as we approach the holiday season. Are there better items or more specific items that would be smarter to purchase using this?
That’s a great question. So, you know, in thinking about your musical instrument. If I may ask, was it over $500?
I’m afraid it was, yes.
I would say for high-dollar, high-ticket items, reconsider that. And the reason is because there’s a high likelihood that if you need to return it, you’re going to have trouble.
And that’s one thing that Consumer Reports has found in some nationally representative surveys that we’ve done. We found about three quarters of people are quite happy with the process, but about 25% have some issue. And the thing is, when they have an issue, it’s serious and it’s things like “I try to return the merchandise. It took me forever and I was still on the hook for the payments.”
Some people said, well, “I had to return it because I couldn’t pay for it.” And then they’re still on the hook for it and they’re not paying. And now the bill collectors come after you.
Like, if you did have a good credit score, that’s gone. The first big like “no no” is high-dollar, high-ticket item. Expensive stuff.
You’re think it over $500?
That’s like my random. But everybody’s threshold is different.
But I would say definitely like appliances, mattresses, musical equipment, golf, sporting goods equipment, stuff that is like multiple hundreds of dollars into the thousands.
Anything else we should be aware of here?
Yeah. So, you know, a lot of people, when you’re purchasing clothing or shoes, it’s not uncommon that you’re going to purchase a couple of the same thing to try it on at home. You’re going to return the rest.
If you do that, and then you’re going to use buy now, pay later, there are so many people who complain to the Consumer Financial Protection Bureau – which is the last place that a consumer can get help if they’re not able to return things easily – saying, “Well, I bought three shoes, I needed only one. I return two and I’m still paying for it and I can’t get the refund to happen.”
You mentioned the Consumer Financial Protection Bureau. Are they doing anything about that?
They’ve done quite a bit. And the most recent thing they did that was, I think, very helpful for consumers and a lot of consumer advocates were very excited.
Back in July they issued what they called an interpretive rule. And I feel like it’s like an interpretive dance. And what they did is they took existing law, the Truth in Lending Act – it has to do with how companies that offer credit deal with consumers and what they offer consumers – and they issued a couple of basically gentle mandates to the industry. And one of them was the right to return items, the right to end the charge.
So, you know, one thing about using a credit card for your musical equipment would have been if you didn’t like that bass or that amp and it didn’t work, you could you could return it and demand that the credit card company stop payment.
So that’s called a chargeback, right? So you don’t have that with any buy now, pay later/pay in 4 loan or any of even the longer term loans. You don’t have a chargeback. But you do if you use a Mastercard or Visa.
So the Consumer Financial Protection Bureau back in July gently wagged a finger to the industry and said, “You need to offer that and make sure it’s clear to consumers that when they’re trying to return merchandise for any reason, that you stop the payments as fast as possible.”
