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Buy Now, Pay Later Loans and Their Impact on Credit Reporting

Posted by Sami Thalji | Jul 10, 2024

In recent years, shoppers have turned to "buy now, pay later" (BNPL) loans as a simple, interest-free way to buy items like clothes and concert tickets. These loans typically don't show up on credit reports or affect credit scores. This raises concerns that people might be taking on more debt than lenders and financial regulators can see.

In February, Apple announced it would report loans from its Apple Pay Later program to Experian, a major U.S. credit bureau. This was seen as a significant step for the BNPL industry. However, other major BNPL providers have not followed Apple's lead. While credit bureaus and lenders are interested in working together, significant challenges remain. Some BNPL firms are even considering creating their own credit bureau to handle these loans.

BNPL loans allow consumers to pay for purchases over time, usually in four installments over six weeks, interest-free. These loans became very popular during the pandemic, contributing to a boom in online shopping. This growth has continued, with retailers noting record holiday sales due in part to BNPL options. However, economists at Wells Fargo have warned that this "phantom debt" could cause problems for both consumers and the economy.

Credit bureaus believe that including BNPL loans in credit reports would benefit consumers, who could build credit by repaying on time, and lenders, who would gain a more complete picture of consumers' borrowing habits. While BNPL providers agree in theory, they worry that reporting these loans might hurt their customers. Current scoring models might penalize borrowers who take out multiple short-term loans, unlike traditional credit card purchases.

The U.S. credit reporting system has evolved over the years into a complex network involving banks, mortgage brokers, auto lenders, and three major credit bureaus: Equifax, Experian, and TransUnion. These bureaus compile data from lenders and provide it to other lenders and consumers, as well as companies like FICO and VantageScore, which create credit scores. The bureaus say they addressed BNPL concerns by creating a category for these loans, which should allow for better integration into credit scores without penalizing users.

Despite this, BNPL providers argue that the system isn't ready. BNPL loans are typically paid biweekly, but credit bureaus usually receive data monthly. Klarna, a major BNPL firm, reports loans to TransUnion and Experian in Britain, where the system is different. In the U.S., Affirm reports some longer-term loans to Experian and hopes to include shorter-term loans eventually. Other providers like Afterpay, PayPal, and Zip still see issues with the current system.

In February, Apple announced it would start reporting Apple Pay Later loans to Experian, but other BNPL firms haven't followed suit. Apple sees this as a step toward helping users build their credit. Some in the industry believe that the credit-reporting system can handle BNPL loans, but many BNPL providers are exploring alternatives.

For example, Qlarifi, a new data-aggregation platform, aims to handle BNPL loans more efficiently by collecting and sharing data in real time. The industry believes BNPL loans will eventually be included in the credit scoring system, but it's unclear what will drive this change. It could be either market forces or regulatory action.

Regulatory action seems unlikely at the federal level for now. The Consumer Financial Protection Bureau (CFPB) has shown interest in including BNPL loans in credit reports but hasn't required it. Some states, like California and New York, are considering regulating the BNPL industry, but these efforts don't yet mandate reporting to credit bureaus.

Traditional lenders report to credit bureaus because it helps in lending decisions and encourages borrowers to repay. BNPL providers might not feel the same pressure because their business is growing, and most consumers are making their payments. However, if the economy slows and more consumers start missing payments, BNPL firms might need to join the credit reporting system to assess borrowers' reliability.

The BNPL industry hasn't faced a major issue with delinquencies yet. But if problems arise, it might push the industry to integrate more closely with the credit reporting system.

About the Author

Sami Thalji

Sami Thalji is a native Floridian, born in Clearwater and raised in St. Petersburg, Florida. Sami graduated from Osceola High School in Seminole, Florida before attending and receiving both his Bachelor of Science and Juris Doctor from the University of Florida in Ga...


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