The buy now, pay later consumption model hides high interest rates

[New Sancai Compilation First Edition] Due to the impact of various economic factors, Americans' credit card balances have reached record highs recently and default rates continue to rise, making more and more shoppers spend time on holidays or key days. At this time, use the "Buy Now, Pay Later, BNPL" credit model to expand your budget for consumption.

Karen in California is one of those Americans who switched to a buy now, pay later service when shopping for holiday items to avoid higher credit card interest rates. Karen wants to buy the latest Apple tablet and is considering using Klarna's buy now, pay later finance service to split the cost into four installments. Karen also plans to take out a multi-week loan, which she plans to use to travel and purchase other items.

But U.S. consumer advocates have issued a warning to cash-strapped consumers, pointing out that the interest rate of this model of spending now and paying later, which is used for several months, can be as high as 36%, which is the loan required by many state governments. The highest interest rate an institution can charge. A spokesman for the National Foundation for Credit Counseling said that more and more Americans are using buy-now-pay-later loans to finance their purchases, which means the nation's short-term debt is increasing.

This consumer loan model allows shoppers to purchase almost anything, from high-end leather goods to items worth hundreds of dollars, without having to pay in full at once. After Walmart in the United States allowed people to use Affirm to buy now, pay later, its global e-commerce volume reached 5%.

Consumer advocates have warned that such loans could prompt some shoppers to make impulsive purchases of jewelry, fashion clothing, electronics or appliances they wouldn't otherwise be able to afford. Credit analysts are also concerned about the surge in shoppers using Affirm, Klarna and various other payment options as rising costs of housing and food have eroded people's budgets. They feel as though the debt burden last year was particularly severe.

Merchants that provide this service will first look at the shopper's credit status to decide whether to charge interest and determine the interest rate. Many merchants advertise biweekly installments with zero interest and four payments. Consumer Reports staff say data shows the typical BNPL borrower has taken on more debt, has become more financially vulnerable and under greater stress.

Families who must use loans to buy food and other necessities may find their debts snowball, exacerbating their predicament. For these consumers, they may be paying higher interest rates than even the most expensive store credit cards available today.

Credit analysts warn that even if consumers do not default on their loans, they may be at risk of rapidly rising consumer costs due to overspending. One consumer thought he just wanted something and failed to read the fine print of the loan, and later discovered during a debt review that the interest rate on his shopping loan was as high as over 30 percent. He said he fell into a trap and showed a digital chart pointing out that on a shopping loan of more than $500, he ended up paying a total of $175 in interest. So he plans to pay off all his debts as quickly as possible and not add more debt to himself.

(Compiled by: Mulian)

(Editor: Jiang Qiming)

(Source of the article: First published by Xinsancai)