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EXPLANATION: What you need to know about “buy now, pay later”

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NEW YORK (AP) — Since the start of the pandemic, the “buy now, pay later” option has exploded in popularity, especially among young and low-income consumers who may not have easy access to traditional credit.

If you’re shopping online for clothes or furniture, sneakers, or concert tickets, you’ve seen the option at checkout to split the cost into smaller installments over time. Companies like After-payment, To affirm, Klarnaand PayPal all offer the service, with Apple expected to enter the market later this year.

But with the increase in economic instability, the unpaid ones too. Here’s what you need to know:

HOW TO BUY NOW, PAY LATER?

Called “interest-free loans,” buy-it-now-pay-later services require you to download an app, link a bank account or debit or credit card, and sign up to pay in weekly or monthly installments. Some companies, such as Klarna and Afterpay, perform soft credit checks, which are not reported to credit bureaus, before approving borrowers. Most are approved within minutes. Scheduled payments are then automatically deducted from your account or charged to your card.

The services generally don’t charge you more than you would have paid upfront, which means there’s technically no interest, as long as you make the payments on time.

But if you pay late, you may be subject to a flat fee or a fee calculated as a percentage of the total you owe. These can reach $34 plus interest. If you miss multiple payments, you could be barred from using the service in the future, and the delinquency could hurt your credit score.

ARE MY PURCHASES PROTECTED?

In the United States, buy-it-now and pay-later services are currently not covered by the Truth in Lending Act, which regulates credit cards and other types of loans (those repaid in more than four installments).

This means you may have a harder time settling disputes with merchants, returning items, or getting your money back in the event of fraud. Companies can offer protections, but they are not obligated to do so.

Lauren Saunders, associate director at the National Consumer Law Center, advises borrowers to avoid linking a credit card to buy now, pay later applications whenever possible. If you do, you lose the protections you get from using the credit card while exposing yourself to owing interest to the card company.

“Use the credit card directly and get those protections,” she said. “Otherwise it’s the worst of both worlds.”

WHAT ARE THE OTHER RISKS?

Because there are no centralized reports on Buy Now, Pay Later, these debts won’t necessarily show up on your credit profile with major credit rating agencies.

This means more businesses can afford you to buy more items, even if you can’t afford them, because lenders don’t know how many loans you’ve taken from other businesses.

Payments you make on time are not reported to credit rating agencies, but missed payments are.

“Right now, buy now, pay later usually can’t help you build credit, but it can hurt,” Saunders said.

Elyse Hicks, consumer policy adviser at Americans for Financial Reform, a progressive nonprofit, said people might not be considering seriously enough whether they will still be able to afford the payments in the future.

“Because of inflation, people may think, ‘I’m going to have to get what I need and pay for it later in these installments,'” she said. “But are you still going to be able to afford the things you’re affording now six months from now?”

WHY ARE RETAILERS OFFERING BUY NOW, PAY LATER?

Retailers accept buy-it-now fees and pay for services later as products increase basket sizes. When shoppers have the option of paying for their purchases in installments, they are more likely to purchase more goods in one go.

When Apple recently announced it would be creating its own buy now, pay later service, 23-year-old Josiah Herndon joked on Twitter about “paying for 6 carts of (things) I can’t afford with Apple, Klarna, Afterpay, PayPal Pay in 4, shop, pay in 4 and confirm.

Herndon, who works in insurance in Indianapolis, said he started using the services because it took him a long time to get approved for a credit card because his age meant he didn’t have no extensive credit history. He has since used them to pay for high-end clothes, shoes and other luxury goods. Herndon said he aligns payment schedules with his paychecks so he doesn’t miss payments, and called the option “very convenient.”

WHO SHOULD USE BUY NOW, PAY LATER?

If you have the ability to make all payments on time, buy now, pay later, loans are a relatively healthy, interest-free form of consumer credit.

“If (the loans) work as promised, and if people can avoid late fees and don’t have trouble managing their finances, they have a place,” said Saunders of the National Consumer Law Center.

But if you’re looking to boost your credit score and are able to make payments on time, a credit card is a better bet. The same applies if you want strong legal protection against fraud and clear, centralized loan reporting.

If you’re unsure whether you’ll be able to make payments on time, consider whether the fees charged by buy-it-now and pay-later companies will incur higher fees than the penalties and interest charged by a credit card company or other lender.

HOW WILL ECONOMIC INSTABILITY AFFECT BUY NOW, PAY LATER?

As the cost of living rises, some shoppers have started splitting payments on essentials, rather than big-ticket items like electronics or designer clothes. A Morning Consult poll released this week found that 15% of ‘buy now, pay later’ customers use the service for routine purchases, such as groceries and gas, raising alarm bells among financial advisors .

Hicks points out that the growing number of overdue payments is a sign that buy now, pay later could already be contributing to unmanageable debt for consumers. A July report from ratings agency Fitch found app chargebacks rose sharply in the 12 months to March 31, up 4.1% for Afterpay, while chargebacks on credit cards were relatively stable at 1.4%.

“The growing popularity of this is going to be interesting to see over these different economic waves,” Hicks said. “The immediate fallout is what’s happening now.”

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