The Consumer Financial Protection Bureau said Wednesday that people who take out buy-now-pay-later loans will soon have better rights when they want to get their money back.
The federal agency that protects consumers is treating buy-now-pay-later lenders the same way it treats credit card companies. This means that, like credit card companies, these lenders need to look into disputed purchases and refund money for returned goods and canceled services.
CFP Director Rohit Chopra said that the announcement “means that consumers should get disclosures that lay out fees, pricing structures, and rights and protections for things like disputing bills and getting refunds.” “Customers can get help when a merchant gives them the runaround when they have a billing dispute.”
Chopra also said that the person doesn’t have to pay back the loan while the charge dispute is still going on. He explained that if a customer returns an item for a refund, that return is applied as a credit to the buy-now-pay-later loan.
A CFPB report from 2022 says that almost 14% of buy-now-pay-later loans given out in 2021 were used to buy something that was later disputed or returned.
The rules, which become official 60 days after being added to the federal government’s list of regulations and notices, make things more consistent for an alternative to credit cards that is becoming more popular. Consumer rights groups called the news a win, and some big buy-now-pay-later lenders said they are already taking these steps.
Credit Cards vs. Buy Now Pay Later
Buy-now-pay-later lenders usually break up the price of an item into four interest-free payments that are due back in a short amount of time, like a few weeks. Depending on the lender and the terms of the loan, interest and late fees may be charged if the person takes too long to pay it back.
Credit cards, on the other hand, charge interest on the balances you carry each month based on annual percentage rates. To fight inflation, the Federal Reserve keeps its benchmark interest rate at a level that hasn’t been seen in 20 years. This makes these APRs even higher.
The average annual percentage rate (APR) for credit cards with revolving balances rose from 20.92% in the first quarter of 2016 to 22.63% in the first quarter of 2017. In the meantime, buy-now-pay-later lender Even though Klarna says its new card isn’t a credit card, it can still have an interest rate of 14.99% to 33.99%.
Fed research released Tuesday shows that 14% of people said they had used buy-now-pay-later platforms in the past year, up from 12% the year before. The Fed found that women, Black and Hispanic adults, and people making less than $100,000 were more likely to use buy-now-pay-later services.
The Fed’s research showed that 55% of users said they used this method because it was the only way they could afford the item.
Because buy-now-pay-later services are still new, it’s not always easy for major credit reporting agencies to get information about how well people are paying back their loans. There are worries among economists and advocates that the number of people with “phantom debt” is growing because their full debts aren’t always visible.
Adam Rust, director of financial services at the Consumer Federation of America, says that everyone should be protected the same way when they use buy-now-pay-later platforms like they do when they use credit cards.
“That hole in the right to get a refund and have a dispute settled is now closed,” he said Wednesday.
The new rules mean that “all competitors have to play by the same rules,” Rust said. Some buy-now-pay-later companies already do these things. He also said that the next step should be to set industry standards for how much of a loan people can afford.
How lenders that let you buy now and pay later are reacting
Klarna and Affirm AFRM, -0.91%, two lenders, said they were already taking the steps that will be needed. However, they did say that the CFPB rules could set some consistent standards for the new way that consumers can get loans.
Klarna said in a statement, “From what we’ve read so far, this announcement doesn’t require any major changes to Klarna’s business. We also see today’s announcement as a big step toward getting [buy-now-pay-later] regulation in place in the U.S.”
The company also said that it’s “baffling” that the CFPB’s guidance doesn’t take into account the main differences between [buy-now-pay-later] and credit cards.
One person from Affirm said that the company was “encouraged that the CFPB is promoting consistent industry standards, many of which already reflect how Affirm operates, to give consumers more choice and transparency.”
This person also said, “We urge other companies that offer buy-now-pay-later products to live up to the industry’s promise to give customers a more flexible and clear alternative to other payment options.”
