A newly released study by the Consumer Financial Protection Bureau (CFPB) suggests that millions of Americans might not realize just how much getting a payday advance can cost them.

How do payday advance products work?

Paycheck advance products are short-term loans that allow you to borrow money against your next paycheck. If you’re short on cash before payday and need funds for emergencies or unexpected expenses, these products can provide quick financial relief. You may be able to do this through your employer or specialist “payday lenders or “payday loan companies.”

According to the CFPB, nearly three-quarters of American workers are paid in arrears every two weeks or once a month. This means they are paid two to four weeks after completing the work.

Paycheck advance products make funds available to workers before payday. That money is then deducted from their next paycheck. For people who struggle to make ends meet from paycheck to paycheck, getting the money they’ve earned a little sooner can make the difference in whether or not they can pay bills on time.

Paycheck advances have become very popular. The CFPB estimates that the number of paycheck advance transactions nearly doubled from 2021 to 2022. In 2022, more than 7 million workers opted for paycheck advances. Advances totaled about $22 billion.

Is there a catch with paycheck advances?

Payday advances are expensive, and fees are deducted from the next paycheck. For regular users, the fees incurred in a typical paycheck advance program are the equivalent of 109.5% per year. This is more expensive than borrowing money with a credit card.

The CFPB has proposed that these advances should be considered loans subject to the Truth in Lending Act. This Act is designed to protect consumers against unfair practices and requires lenders to provide loan cost information so that consumers can comparison shop. This would allow people to make informed decisions about the cost of getting their pay a little early.

What about Buy Now Pay Later (BNPL) programs?

Like paycheck advances, BNPL programs have soared in popularity in recent years. People purchase goods today and worry about paying for them over a period of days, weeks or months.

BNPL services typically do not charge interest on installment payments on standard plans, especially if payments are made on time and within the agreed period. However, longer-term financing may be subject to interest payments, promotional offers may come with deferred interest, and missed payments may be subject to late fees.

Potential impact on credit and consumer protection

While paycheck advances and BNPL programs offer immediate financial relief, they can also have significant implications for consumers’ credit health. Frequent use of these services may lead to a cycle of debt, as high fees and interest rates compound financial strain. For paycheck advances, the high annual percentage rates (APRs) can surpass those of traditional credit cards, making them a costly option for regular use. Missed payments or the inability to repay these advances promptly can negatively impact credit scores, as they may be reported to credit bureaus.

Given these risks, there’s a growing call for regulatory oversight to protect consumers. The CFPB’s proposal to categorize paycheck advances as loans under the Truth in Lending Act is a crucial step in this direction. By enforcing transparency and requiring lenders to disclose the full cost of borrowing, consumers can make more informed financial decisions. This level of oversight would also align paycheck advance products with other credit products, ensuring that users are aware of the potential long-term costs and risks associated with early access to earned wages.

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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.

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Late payments ease for another month

TransUnion’s April 2024 Credit Industry Snapshot found that delinquency rates fell for auto loans, credit cards, mortgages and personal loans. This was the second month in a row in which delinquency rates eased. However, delinquencies are up over the past year for all credit products except personal loans. Average balances for credit card accounts and mortgages increased but decreased for personal loans. See report at TransUnion.com.

Home sales weaken for a second consecutive month

Existing home sales fell by 2.1% in April 2024 to a seasonally adjusted annual pace of 4,140,000 homes. This follows a previous decline in sales in March 2024. Existing home sales have now declined by 1.9% over the past 12 months. Despite falling sales volume, the median price of home sales rose to $407,600 in April 2024. This may be the result of sales volume growth at the higher end of the market rather than representing price growth across the board. See details at NAR.Realtor.

Government orders BNPL providers to follow credit card rules

The Consumer Financial Protection Bureau (CFPB) has determined that providers of Buy Now Pay Later (BNPL) loans must follow the same regulations as credit card issuers under the Truth in Lending Act. This means BNPL lenders must investigate consumer disputes and pause payment requirements while the investigation is pending. They also must credit refunds to customers’ accounts when merchandise is returned. Finally, BNPL issuers must also provide customers with periodic statements. See the news release at ConsumerFinance.gov.

FDIC says US banking system is healthy despite troubles

The Federal Deposit Insurance Corporation (FDIC) released its 2024 Risk Review of the US banking system. The report found that overall banking conditions as of the end of 2023 were good, despite bank failures earlier in the year. 1.1% of banks were identified as “problem banks.” That percentage is at the low end of the typical range. Big-picture risks include interest rates remaining high and declining deposits. Specific business areas of concern were commercial real estate and consumer loans, both of which showed deteriorating credit quality. The report also noted the operational risk of fraud and ransomware attacks on banks and said growing geopolitical tensions increase the risk of cyber-attacks. See report at FDIC.gov.

Mastercard program to use AI to prevent fraud before it happens

Mastercard announced it is rolling out new software that uses artificial intelligence to predict which credit cards may have been compromised before thieves get a chance to use them. Credit card information is often stolen when the cards are used at outlets fitted with illegal skimmers or where someone is manually recording the information. Mastercard’s new software looks at patterns of where compromised credit cards have been used. It then looks at other credit cards with similar usage patterns to determine if they are at risk. Mastercard hopes to issue replacement cards before newly-compromised card information can be used. See article at AP.com.

Uptick in mortgage applications reflects refinancing activity

Mortgage applications rose by 1.9% last week on a seasonally adjusted basis. Behind the overall rise were divergent trends in refinancing and purchases. Applications for refinance loans were up 7% for the week and 21% over the past year. Meanwhile, purchase mortgage applications declined by 1% last week and were 11% lower than a year earlier. The rise in refinancing activity comes despite the fact that mortgage rates are more than half a percent higher than they were a year ago. See mortgage activity details at MBA.org.

Mortgage rates fall below 7%

30-year mortgage rates fell for a third straight week. They declined by 0.08% to reach 6.94%. Over the three weeks of declines, mortgage rates have fallen by a total of 0.28%. However, mortgage rates are still 0.33% higher than they were when at the beginning of 2024. See rate data at FreddieMac.com.

Experience with credit card debt depends on income

A new analysis by the Federal Reserve Bank of St. Louis shows how the impact of credit card debt varies with income. While 51% of American households have credit card debt, this number is above 60% in the seventh decile. Deciles are 10% increments of the population ranked by earnings, with the first decile being the lowest earners and the tenth decile being the highest. The lowest earners and highest earners are the least likely to have credit card debt. The percentage of households with credit card debt is below 30% for each. However, for those low earners who do have credit card debt, it represents 90% of their monthly income. That’s the highest burden of any income group. See analysis at StLouisFed.org.

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• Last week’s news roundup May 18, 2024
• Next week’s news roundup June 1, 2024

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1. Inflation ticked up in January 2024
2. Producer prices add support to inflationary resurgence
3. Japan and UK fall into recession
4. Consumer complaints rose slightly in 2023
5. Buy Now Pay Later appears to be habit-forming among financially fragile households
6. Retail sales suffer sudden drop
7. Mortgage rates make significant jump

Inflation ticked up in January 2024

The January 2024 Consumer Price Index report was a reminder of just how stubborn inflation can be. Inflation for the month came in at 0.3%, the highest monthly reading since September 2023. That monthly rate would project to annual inflation of 3.66%, above the 3.1% rate for the last twelve months. Worse, core inflation came in at 0.4% for January and was 3.9% over the past 12 months. While inflation has slowed since its peak of 8.9% in mid-2022, it remains well above the Fed’s 2% target, and progress seems to have stalled. January’s inflation was higher than investors and economists had expected, sending the stock market plunging on the news. See news release at BLS.gov.

Producer prices add support to inflationary resurgence

The Producer Price Index (PPI) rose by 0.3% in January. This was the biggest rise in the PPI since last August. The cost for services grew faster than the cost of goods, suggesting that the labor shortage may be helping to fuel the revival of inflation. Over the past 12 months, the PPI was up just 0.9%. Until now, slower price increases have given producers room to ease up on retail price increases. However, the uptick in producer price increases in January will likely keep upward pressure on consumer prices. See news release at BLS.gov.

Japan and UK fall into recession

The latest economic releases this week revealed that the economies of both Japan and the United Kingdom are in a recession. A recession is a period in which inflation-adjusted economic activity is shrinking. Japan’s and the United Kingdom’s economies have now contracted for two consecutive quarters. That is a widely accepted parameter for declaring a recession, though not always definitive. The shrinkage of Japan’s economy allowed Germany to surpass it as the world’s third largest, behind the United States and China. The economic setback for the United Kingdom further weakens Prime Minister Rishi Sunak’s hold on power, with a general election looming in less than a year. See article at Business-Standard.com.

Consumer complaints rose slightly in 2023

The Federal Trade Commission just released some new data from its Consumer Sentinel Network (CSN), which tracks consumer complaints about various issues. The CSN received nearly 5.4 million reports in 2023, up 5.3 million in 2022 but short of the 6.1 million received in 2021. Identity theft was the most commonly reported problem, representing 19.23% of the total. Credit cards were the most common target of identity theft. This included people fraudulently using information on existing cards and those making unauthorized applications for a new card in someone else’s name. People in their 20s were the most common victims of fraud, though those aged 80 or above suffered the highest average losses. See full report at FTC.gov.

Buy Now Pay Later appears to be habit-forming among financially fragile households

A new analysis of survey data by the Federal Reserve Bank of New York found that financially fragile households tend to use Buy Now Pay Later (BNPL) plans more frequently than financially stable households. Financially fragile households are defined as those with one or more of the following characteristics: credit score below 620, having had a credit application declined within the past year, and having become 30 or more days delinquent on loan payments within the past year. Among households that use BNPL, 60% of financially fragile ones have used it five or more times within the past year, compared with 23% of financially stable households. The bulk of BNPL purchases by financially fragile households are under $250, while financially stable households tend to use it more for larger purchases. BNPL users often seem under the mistaken impression that using it will help their credit. See analysis at NewYorkFed.org.

Retail sales suffer sudden drop

The Census Bureau reported that retail sales fell by 0.8% in January after rising by 0.4% in December. That was only their second decline since the middle of last year and the largest decline since March of 2023. Notably, the numbers are adjusted for seasonal variations and reflect the typical fall-off in retail sales after the holidays. The steep drop in retail sales may suggest that the solid economic growth seen in the latter half of last year is ending. See article at Yahoo.com.

Mortgage rates make significant jump

30-year mortgage rates rose by 0.13% last week to reach 6.77%. This was the largest single-week rise in mortgage rates since last October. Before last week’s jump, mortgage rates had stayed within a tight range between 6.62% and 6.69% so far in 2024. The sudden rise may be a sign of things to come after Tuesday’s report of surprisingly strong inflation for January. High inflation tends to send interest rates higher. See rate details at FreddieMac.com.

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1. Mortgage rates continue to head lower
2. FDIC announces special assessment to settle failed bank costs
3. Survey finds Buy Now Pay Later on the rise this holiday season
4. Credit applications decline as rejection rates rise
5. Retailers face inventory glut in advance of holiday season
6. Consumer debt balances and delinquency rates rise again
7. Bank overdraft charges resume downward course in third quarter
8. Distress over debt remains elevated
9. Fintechs help drive personal loan use higher

1. Mortgage rates continue to head lower

30-year mortgage rates continued their recent slide with a 0.15% decline last week. This was the fourth consecutive weekly decline for 30-year rates, bringing them down to 7.29%. Overall, 30-year rates are half a percentage lower than the peak they reached on October 26. They are still 0.87% higher than when the year began. See rate details at FreddieMac.com.

2. FDIC announces special assessment to settle failed bank costs

The FDIC’s insurance fund that protects depositors when banks fail was heavily depleted by large failures earlier this year. The FDIC will temporarily charge banks a special fee to build the fund back up. The fee will amount to a total of about 0.27% of a bank’s assets, charged in quarterly increments over two years. This fee will only be charged to banks with over $5 billion in assets, so the FDIC expects it to affect only 114 banks. A reason the cost to the insurance fund was so high was because the FDIC decided to back $16.3 billion in uninsured deposits. See announcement at FDIC.gov.

3. Survey finds Buy Now Pay Later on the rise this holiday season

According to a poll by Morning Consult, 35% of Americans are considering using Buy Now Pay Later (BNPL) loans this holiday season. That’s up eight percentage points from last year. The percentage interested in using BNPL in 2023 rises to 49% among people who describe their financial condition as “anxious.” As BNPL loans have grown in popularity, so has controversy over the approach. Consumer advocates warn that easy access to this method of financing can lead people to quickly accumulate a lot of short-term debt they are in no position to pay off. In that situation, fees and interest charges can top an annual rate of 36%. Some BNPL providers have no limits on how many late fees they can charge before a debt is repaid. See article at Forbes.com.

4. Credit applications decline as rejection rates rise

The percentage of consumers applying for new credit accounts has declined. Those consumers who apply are facing more demanding standards from lenders. The New York Fed’s Credit Access Survey found that as of October, 41.2% of Americans had applied for credit recently. This is down from 44.8% a year ago and 45.8% just prior to the pandemic. The rejection rate for credit applications has risen to 20.1%. This is up from 18.0% a year ago and 17.6% just prior to the pandemic. One exception to these trends is in the numbers for applications for credit limit increases. A higher percentage of Americans are applying for larger limits on their credit cards, and the rejection rate for these applications has fallen. The survey also found that the percentage of Americans who could come up with $2,000 if an emergency arose within the next month fell to its lowest since 2013. See survey details at NewYorkFed.org.

5. Retailers face inventory glut in advance of holiday season

Two-thirds of major US retailers reportedly are stocking more inventory than they will need this holiday season. That conclusion is based on an analysis of 30 large retail companies by the financial information platform LSEG Workplace. The oversupply comes as American consumers are expected to increase holiday spending over last year by only about the inflation rate. Too much inventory could lead to aggressive discounting. While bad for retailers, consumers would welcome that and could further ease inflation pressure. See article at Yahoo.com.

6. Consumer debt balances and delinquency rates rise again

The latest TransUnion Credit Industry Snapshot found that more consumers fell seriously behind on their debt payments in October. Meanwhile, the size of their debt balances grew. Rates of serious delinquency rose for all major forms of consumer borrowing. Credit card delinquencies rose overall, and for subprime borrowers, they rose above the 20% level. See report at TransUnion.com.

7. Bank overdraft charges resume downward course in third quarter

US banks reported that overdraft fees declined by 3% in the third quarter of 2023 to $1.37 billion. Overdraft fees have now fallen by 22.7% from a year earlier. Those fees have generally been trending downward since the fourth quarter of 2021, except for a mild increase during the second quarter of this year. See analysis at S&PGlobal.com.

8. Distress over debt remains elevated

According to the National Foundation for Credit Counseling (NFCC), American consumers’ concern with unsecured debt dipped slightly in the third quarter but remained high. The NFCC’s Consumer Debt Score measures how distressed Americans are with their debt. The baseline score is 50, representing a normal level of distress over debt. The third quarter score was 64, which means people are significantly more distressed about debt than usual. However, this represented a marginal improvement over the second quarter’s score of 66. Despite this, the distress level has increased sharply since the second quarter of 2021. See news release at NFCC.org.

9. Fintechs help drive personal loan use higher

The amount of unsecured personal loan debt outstanding has increased sharply in 2022 and 2023. The total amount owed on these loans now stands at $232 billion, up 17.24% over the past 12 months. Fintech firms have played a significant role in the growth of personal loan debt, partly because they use untraditional measures of creditworthiness. Those methods will be tested now that the borrowing base is larger and delinquency rates are rising. See news release at NewYorkFed.org.

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• Last week’s news roundup November 18, 2023
• Next week’s news roundup December 2, 2023

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1. IRS goes after unscrupulous tax preparers
2. Bank deposits show unusual decline
3. Americans have burned through their pandemic savings
4. Survey finds many Buy Now Pay Later users struggling with debt
5. Congress brings the government back to the brink of shutdown
6. Mortgage rates rise to highest level since the year 2000
7. Mortgage applications continue to decrease
8. Consumer confidence in the economy is falling

1. IRS goes after unscrupulous tax preparers

The IRS has announced that it is investigating the “questionable practices” of some professional tax preparers. The practices center around a pandemic-era small business tax credit for employee retention. The IRS has announced that it’s pausing processing of the Employee Retention Credit due to a “surge of questionable claims.” The tax agency is concerned that payroll records are being manipulated to make it appear more employees were retained during the pandemic than was the case. The IRS is also concerned that unscrupulous tax preparers target less sophisticated business owners. Fraudulent claims can ultimately lead to those business owners incurring audits, tax penalties and other consequences. See article at CNBC.com.

2. Bank deposits show unusual decline

The total deposits at U.S. banks declined for the year ending June 30, 2023. That’s the first 12-month decline since the Federal Reserve’s deposit data series began in 1994. Less than half of the top 50 U.S. banks could grow their deposits during the period, and those that did often grew primarily through mergers and acquisitions rather than by attracting new deposits. The four largest banks – JP Morgan Chase, Bank of America, Wells Fargo and Citigroup – all experienced deposit declines during the period. Despite this, the total market share of the big four increased slightly, indicating that deposit declines were the norm for the industry. See analysis at SPGlobal.com.

3. Americans have burned through their pandemic savings

Liquid assets of American households are currently lower than before the pandemic. A Federal Reserve study found that household liquid assets (cash, bank deposits, etc.) were lower as of June 30, 2023 than as of March 31, 2020. Only the top one-fifth of households have been able to increase their liquid holdings since that date. See article at Yahoo.com.

4. Survey finds many Buy Now Pay Later users struggling with debt

A survey by business intelligence firm Morning Consult found significant numbers of Buy Now Pay Later (BNPL) users are having trouble keeping up with their payments. More than 40% of BNPL users have unpaid debt in the programs. Over 25% missed a payment and paid a late fee within the past month. 27% saw their credit score decline, and 22% have had to deal with a debt collector. BNPL users are generally young adults. 37% of Gen Z adults and 32% of millennials reported making a BNPL purchase within the past month. The numbers fall off with older generations to 16% of Gen X and 6% of baby boomers. See article at USAToday.com.

5. Congress brings the government back to the brink of shutdown

A dispute over funding the U.S. budget for the upcoming fiscal year has brought the government close to a shutdown again. The new fiscal year begins October 1. The source of the dispute is a power struggle among House Republicans over Speaker Kevin McCarthy’s leadership. Bipartisan talks are underway to provide temporary funding to extend the deadline. However, previous fiscal brinkmanship has resulted in downgrades of the nation’s credit rating. So, even with an agreement, the repeated threats could raise America’s borrowing costs. See article at BBC.com.

6. Mortgage rates rise to highest level since the year 2000

30-year mortgage rates increased by 12 basis points last week to 7.31%. That’s the highest they’ve been in 23 years. Mortgage rates have been rising fairly steadily for the past eight months. They are now 1.22% higher than when they hit their low point for this year, at 6.09% on February 2. 15-year mortgage rates rose even more sharply last week. They climbed by 18 basis points to 6.72%. See rate details at FreddieMac.com.

7. Mortgage applications continue to decrease

Mortgage applications declined last week and are down sharply from last year. This reflects the continuing impact of higher interest rates. Applications for new purchase mortgages dropped by 2% last week and are 27% lower than it was a year ago. Applications for refinance mortgages dropped by 1% last week and are 21% lower than a year ago. See news releases at MBA.org.

8. Consumer confidence in the economy is falling

The Conference Board’s Consumer Confidence Index fell by 5.2% in September. This was the second consecutive monthly decline for that index. The index component, based on consumers’ assessment of current conditions, rose slightly in September. However, the index component, which measures expectations for the next six months, fell by more than 11% in September. That brought the Expectations Index down below 80, a level traditionally presaged recessions. See press release at Conference-Board.org.

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• Last week’s news roundup September 23, 2023
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1. Job growth continues but slows
2. Workers seek flexibility
3. Buy now pay later programs often used in addition to traditional credit
4. Visa seeks to limit credit card surcharges
5. Heartland Tri-State Bank the latest to fail
6. US government credit rating drops
7. Job turnover slows
8. Government sues auto lender

1. Job growth continues but slows

Employment in the United States continued its long growth streak in July. However, the pace of that growth has eased in recent months. The economy added 187,000 jobs in July, essentially the same as the 185,000 jobs added in June. Both figures are down substantially from May’s addition of 281,000 jobs. Employment has now grown for 31 consecutive months. These figures for recent months are below the 12-month job growth average of 312,000 jobs. This slower job growth may be good news. Unemployment is already low at 3.5%, and there are far more job vacancies than job seekers. More robust job growth at this point would add to inflationary pressures. See employment report at BLS.gov.

2. Workers seek flexibility

American workers increasingly favor jobs that don’t tie them to a particular location. According to an analysis by job-search platform Flexa, 88% of job seekers preferred companies with a “work from anywhere” policy. This kind of policy generally means employees are allowed two to four weeks a year outside the office from any location. This enables them to travel without using up vacation time. 59% of workers went even further, preferring to fully remote work. The percentages for “work from anywhere” policies and fully remote work are up from an April survey. See SeattleTimes.com.

3. Buy now pay later programs often used in addition to traditional credit

Rather than acting as an alternative to traditional credit, buy now pay later (BNPL) programs are often used by consumers alongside traditional credit like loans and credit cards. 54% of BNPL users also report having credit card debt. This makes them more likely to have credit card debt than non-BNPL users, 38% of whom have credit card debt. 33% of Americans currently use BNPL, up from 30% a year ago. An additional 12% say they intend to use BNPL in the future. See article at Forbes.com.

4. Visa seeks to limit credit card surcharges

Credit card issuer Visa is taking action against businesses that charge a surcharge to customers who use credit instead of cash. Visa is capping the additional amount businesses that use its payment processing system can charge for using credit at 3%. It also does not allow businesses to charge their customers a bigger surcharge than the amount the business pays to use the system. Visa even goes to the lengths of sending auditors to businesses to check whether they apply surcharges appropriately. See article at Fortune.com.

5. Heartland Tri-State Bank the latest to fail

A small Kansas bank has joined the list of 2023 bank failures. Heartland Tri-State Bank of Elkhart, KS, was closed on July 28. The FDIC reached an agreement with Dream First Bank of Syracuse, KS, to assume the assets and liabilities of Heartland Tri-State Bank. Customers of the failed bank can now access their accounts at Dream First Bank. Heartland Tri-State Bank had four branches and $130 million in deposits. The failure is expected to cost the FDIC’s insurance fund $54.2 million. See media release at FDIC.gov.

6. US government credit rating drops

Fitch, a credit bureau that issues ratings for institutions like governments and businesses, downgraded the United States’ credit rating. They dropped the US credit rating to AA+, just below AAA’s top credit rating. As with individuals, a reduced credit rating for the US government could result in it paying more to borrow money. Fitch moved despite Congress and the Biden Administration resolving the latest debt ceiling crisis a few months ago. The repeated fiscal brinksmanship plus deteriorating government finances were cited as reasons for the downgrade. US stocks fell in the days following the announcement. See article at Reuters.com.

7. Job turnover slows

Both new hires and separations from jobs slowed down in the latest Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics. New hires slowed by 326,000, while job separations decreased by 288,000 in June. Most notably, the number of people quitting their jobs fell by 295,000. Overall, the job market remains robust, with unemployment extremely low and more job openings than job seekers. See details at BLS.gov.

8. Government sues auto lender

The Consumer Financial Protection Bureau (CFPB) has sued auto loan provider USASF for alleged illegal practices. USASF is accused of using a device to automatically deactivate borrowers’ vehicles, even if they didn’t default on their loans. The CFPB also alleges that USASF failed to refund some customers for prepaid insurance premiums once their loans were paid off and double-charged some borrowers for coverage. Another part of the complaint says that USASF improperly repossessed some borrowers’ vehicles. See news release at ConsumerFinance.gov.

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• Last week’s news roundup July 29, 2023
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As inflation ravages consumer budgets and thwarts retailers’ marketing efforts, Buy Now Pay Later (BNPL) schemes have become ubiquitous, especially online. While this popular payment option has tremendous value for retailers, it can be problematic for consumers, especially the most vulnerable.

How does BNPL work?

Retailers offer BNPL at checkout, mainly to online customers. Consumers can opt to pay for their purchases over time, usually interest-free, by making several installments.

While retailers offer the service, they don’t provide it. That’s done by BNPL lenders, which charge merchants steep fees (4%-9%, averaging about 6%). So BNPL is really a personal loan supplied by a lender to the merchant’s customer. Most providers offer loan amounts of $50 to $1,000.

With a BNPL, the customer makes a down payment–often 25% of the purchase price–and pays off the balance over time in equal installments. Typical plans require four installments due either monthly or every two weeks.

BNPL lenders generally perform a “soft pull” of the buyer’s credit, and some don’t check credit at all. It’s much easier and quicker to be approved for a BNPL arrangement than for a credit card. According to the CFPB, about 75% of applicants are approved for BNPL purchases.

Usually, consumers pay no interest or fees as long as they make their BNPL payments on time. If they pay late, however, they can incur interest charges (rates up to 30%) and/or late fees. BNPL loans are much less-regulated than credit cards.

BNPL lenders don’t often report the loans to credit bureaus, mainly because the industry doesn’t feel credit bureaus are equipped to treat BNPL loans in a way that helps rather than harms customer credit scores.

Why retailers love BNPL

It costs merchants about twice as much to offer BNPL than it does to accept credit card payments, so why do they do this? Consumers at checkout have already decided to buy the item, so why would a seller increase its fees after making the sale?

Because they have not yet in fact made the sale. Fully 70% of online customers exit their purchase at checkout (and mobile users pull out of 85% of purchases!). Retailers call this costly behavior “cart abandonment” and, understandably, devote a great deal of effort toward reducing those numbers.

For retailers, offering BNPL has tremendous advantages:

• 20% more website visits convert to sales
• The average order increases by 87%
• Promotion of their businesses by BNPL lenders

Some retailers have reported 40% higher sales after adding BNPL to their stores.

Most common reason for using Buy Now Pay Later

What types of purchases does BNPL facilitate most? Necessities? Impulse buys?

According to finmasters, consumers who use BNPL reported purchasing the following items:

• Clothing (50%)
• Electronics (33%)
• Shoes (29%)
• Home decor (25%)
• Accessories (22%)
• Beauty products (21%)
• Jewelry (19%)
• Sports equipment (9%)
• Toys (9%)
• Travel (9%)
• Books (8%)
• Event tickets (7%)
• Other (7%)

Most people would probably classify the majority of these items as “wants” rather than “needs.”

But the story changed in 2023. In January and February, groceries’ share of BNPL orders spiked by 40%, while electronics fell by 14%. Mostly younger, poorer Americans became increasingly more likely to use BNPL for food and household necessities.

BNPL advantages for consumers

There are some good reasons for consumers to consider BNPL instead of credit cards or other alternatives.

Easier approval

Consumers who don’t qualify for credit cards have an easier time getting approved for such arrangements. About three-quarters of BNPL applications are approved, while those with fair credit have credit card approval rates of just 20% to 40%.

Cheaper financing

According to the CFPB, Buy Now Pay Later borrowers have lower credit scores than consumers who don’t use BNPL, 580-669 vs 670-739. Because people with lower credit scores pay higher interest rates, Buy Now Pay Later loans with no interest are an attractive alternative for these people.

Borrowers can make emergency grocery or household purchases without resorting to risky and expensive alternatives like payday loans or cash advances.

Hassle-free

BNPL applicants don’t hurt their credit by applying because lenders perform only a soft credit check or no credit check at all. And there is no long application and no waiting for a card to come in the mail. They can use it right away for their purchase.

Pitfalls of BNPL for consumers

The CFPB has expressed concern over BNPL accounts because Buy Now Pay Later products do not offer protections that are standard for other consumer financial products.

• Lack of standardized cost-of-credit disclosures
• Minimal dispute resolution rights
• Forced opt-in to autopay
• Companies that assess multiple late fees on the same missed payment

Consumers can easily become overextended, illustrated by the fact that 45% of respondents surveyed by The Motley Fool said they chose BNPL to “make a purchase outside of one’s budget.”

The CFPB raised this concern as well, saying, “Buy Now Pay Later is engineered to encourage consumers to purchase more and borrow more. As a result, borrowers can easily end up taking out several loans within a short time frame at multiple lenders or Buy Now Pay Later debts may have effects on other debts.”

Lenders may unknowingly exacerbate this problem and advance more credit than borrowers can afford or should have. “Because most Buy Now Pay Later lenders do not currently furnish data to the major credit reporting companies, both Buy Now Pay Later and other lenders are unaware of the borrower’s current liabilities when making a decision to originate new loans.”

In fact, Buy Now Pay Later borrowers are heavier users of other loan products than non-BNPL borrowers, including store cards (62% vs. 44%), personal loans (32% vs. 13%), and student loans (33% vs.17%).

There are other problems for consumers, especially low-income or inexperienced borrowers. BNPL customers, especially those with multiple loans, can have problems keeping track of their payment due dates. This results in finance charges or late fees. In fact, about 25% of BNPL borrowers end up behind on their payments.

Returns can be problematic with BNPL schemes because the loans don’t always go away when the product is returned. Hassles ensue. The biggest pitfall, however, is that BNPL encourages people to spend more and think less. One C + R Research study found that 57% of BNPL borrowers regretted using the service, mainly because they “spent more than they could afford to pay.”

The future of BNPL

The BNPL industry has enjoyed wild growth in recent years and is poised for more. One big reason is its popularity with young adults who tend to distrust credit cards and prefer something they view as more transparent. The industry is fairly young and many forces are in play.

• BNPL lenders advance money at no cost but pay to borrow it. As interest rates rise, profits are being squeezed.
• Economic downturns can make BNPL loans go very bad very fast. Losses have begun piling up and major players’ stocks have been downgraded.
• Experts anticipate ramped-up regulation of the industry, which increases costs and could slow growth.
• Credit reporting agencies are altering their products to incorporate BNPL into credit scoring models. If lenders start reporting (and it’s possible that they may be forced to, given the concerns of the CFPB), credit-challenged borrowers may use them to build credit in the future. If BNPL balances are reported, lenders have access to better information and are less likely to grant unaffordable loans.
• Demand for BNPL in-store is high, while challenges with POS system integration have slowed adoption by retailers. The service will likely become more common as lenders and retailers work together to meet this challenge.

There is a best-case scenario for using Buy Now Pay Later. BNPL lenders will disclose more. Borrowers will understand their payments, interest rates and penalties before committing to a payment scheme. And with loans being reported to credit bureaus, traditional lenders will be less likely to grant excessive credit to those who can’t afford it. At its best, BNPL is a legitimate competitor to credit cards. At its worst, it’s a trap not unlike payday and title loans that prey on financially marginalized, vulnerable people.

If you enjoyed Using Buy Now Pay Later and how it affects your finances you may like,

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Using Buy Now Pay Later and how it affects your finances appeared first on Credit Sesame.

BNPL is a form of consumer credit that has experienced rapid growth in recent years. This growth has raised questions about whether BNPL is a cost-effective payment method.

The Consumer Financial Protection Bureau (CFPB) recently released a report that sheds some light on what types of consumers use BNPL. The characteristics of BNPL users provide clues as to why people may choose BNPL. That insight may be the key to understanding when BNPL is most likely a good choice.

BNPL users have other options

The CFPB noted that its findings contradict a common misconception that people use BNPL because they they can’t get more traditional forms of credit.

Despite being generally younger than non-BNPL users and having lower credit scores, the CFPB study found that people who use BNPL are not shut out of traditional sources of credit. Just the opposite, in fact.

Compared with non-BNPL users, consumers who use BNPL are more likely to have credit card accounts, personal loans and student loans. On average, they have $13,980 in available credit on their credit cards. While this is less than the average of available credit for non-BNPL users, it’s a healthy amount ready to use.

In short, people who use BNPL do have other credit options available. This may suggest they are using BNPL by choice rather than by necessity.

Customers using buy now pay later may have financial problems

BNPL customers are likely to have other credit accounts, but they are also more likely to have poor credit scores and other financial difficulties.

Based on the CFPB’s recent study, here are some typical characteristics of BNPL users:

• BNPL users have under a quarter the non-retirement savings that non-users have.
• BNPL is most popular with people earning between $20,000 and $50,000 a year, and least popular with those earning over $200,000.
• The average credit score of BNPL users is in the sub-prime range (580 to 669). The average of non-BNPL users is in the 670 to 739 range.
• The CFPB survey found that BNPL users are more than twice as likely as non-users to have been delinquent on a credit account within the previous year.
• The median BNPL user in the survey had spent more on BNPL purchases in the previous year than they had in savings at the time of the survey.
• 27.2% more BNPL users carry revolving credit card debt than consumers who don’t use BNPL.
• BNPL users currently have credit card balances equal to about 45% of their credit limits, compared with just over 30% for non-BNPL users.
• BNPL users are more than twice as likely as non-users to have a bank overdraft.
• BNPL users are more likely than non-users to use costly, non-traditional sources of credit such as payday loans, pawn loans and auto title loans.

Which came first: BNPL or credit problems?

The survey characteristics of BNPL users paints a picture of people who use a lot of debt, have trouble keeping up with their payments and have relatively low credit scores.

That profile does not mean that BNPL is to blame for the credit problems of people who use it. For one thing, according to the CFPB many BNPL providers do not report their payments to credit bureaus.

Secondly, the people who now use BNPL already had lower credit scores than non-users even before the surge in BNPL usage in recent years. So it seems BNPL use is a symptom of credit problems, not the cause.

This raises the question of why and when people turn to BNPL as a payment option.

Traditional credit is often more expensive for BNPL users

The CFPB found that 88% of BNPL users have at least one credit card. So, why use BNPL instead?

For some, the answer may lie in their higher credit card utilization rates. BNPL users generally carry more credit card debt than non-users, and some have maxed out their credit limits.

Another reason may be cost. Since BNPL users generally have relatively low credit scores, they are likely to pay particularly high credit card interest rates. Depending on the program, BNPL may give them more time to pay off their purchases without interest or penalties than the typical credit card grace period.

So, there is some logic to choosing BNPL instead of a credit card under some circumstances, but even among people who use BNPL, it’s far from their first choice.

According to the CFPB, people who use BNPL still use their credit cards a lot more. The median sum of BNPL purchases over the year preceding the survey was $1,000. Those same BNPL users had a median credit card balance of $24,679. So, even among people who use BNPL it remains a relatively small portion of their overall credit use.

This may be because the availability of BNPL is still limited. It also may be because people who are new to BNPL are just experimenting with it a little rather than fully embracing.

When BNPL makes sense

The idea of taking time to pay for something without interest sounds appealing. However, it may be an illusion in some cases. That’s because there may be fees associated with BNPL use.

Some BNPL programs charge a transaction fee when you buy something. They may not call this interest, but it is an additional up-front cost.

Most BNPL programs charge late fees. A separate CFPB study found late fees of $7 to $8 on CFPB programs. This may sound minor, but it may be significant as a percentage because BNPL purchases tend to be for relatively small-ticket items. Also, some BNPL providers may charge multiple late fees if more than one payment deadline is missed.

Late fees pose a risk because BNPL programs usually have fairly short payment deadlines. Also, their higher rates of credit card delinquencies suggest that many BNPL users are having trouble making payments in general, and so may be more likely to encounter late fees.

So, while BNPL may seem attractive because it doesn’t charge interest, that advantage could be negated if you encounter fees.

This means BNPL may be worth trying under the following conditions:

• When the program does not charge a transaction fee on purchases
• When consumers are confident in their ability to make the required payments on time avoiding late fees

BNPL usage has expanded quickly, and last year several providers ran into financial difficulties. As a result, expect BNPL companies to revise their business models as they try to find a more profitable approach. This could mean changes to the size and nature of fees, the conditions that trigger fees and the time allowed for repayment.

As those business models change, BNPL customers may want to remain alert to how those changes affect the cost of using BNPL compared to other forms of credit.

If you enjoyed Who is using buy now pay later? you may like.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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1. IRS to wipe out $1.2 billion in late filing fees
2. FDIC issues cease-and-desist letters to 5 crypto firms
3. Mortgage lenders taking more risk as housing market slows
4. BBB issues warning about hidden dangers of buy-now-pay-later
5. Key indicator signals slowing inflation
6. German central bank issues bleak forecast
7. President Biden announces partial student loan forgiveness
8. U.S. economy did better in 2nd quarter than originally thought
9. Clothing retailers cut prices amid lagging sales

1. IRS to wipe out $1.2 billion in late filing fees

The IRS announced that it will wipe out late filing fees that were charged to people who had trouble filing their returns due to the pandemic. The move will cover $1.2 billion worth of fees charged to 1.6 million taxpayers. That works out to an average of $750 in cancelled fees per taxpayer involved. In order to be eligible to have these fees forgiven, taxpayers must file the late returns by September 30, 2022. See full article at Bloomberg.com.

2. FDIC issues cease-and-desist letters to 5 crypto firms

The Federal Deposit Insurance Corporation (FDIC) has issued warnings to 5 websites involved in cryptocurrency trading. The issue is false and misleading statements the sites allegedly made concerning whether deposits in their accounts are federally insured. Investment accounts are not federally-insured, even when they are at FDIC-participating banks. The FDIC gave the 5 firms 15 days to demonstrate that they have complied with the request to remove false or misleading content regarding FDIC insurance from their sites. See full article at Blockchain.news.

3. Mortgage lenders taking more risk as housing market slows

A combination of high home prices and rising interest rates has slowed the housing market down this year. A technical analysis of new mortgages suggests that lenders are responding to lower volume but taking more risk. The analysis was performed by CoreLogic, a specialist in real estate market data. Their analysis shows that a number of risk characteristics for new loans increased in the first quarter of this year. Specifically, a higher share of new mortgages are being written with risk characteristics like low documentation, high loan-to-value and debt-to-income ratios and ownership by investors rather than occupants. The concern is that lenders may be lowering standards in order to keep loan volume up as the market slows. See full analysis at CoreLogic.com.

4. BBB issues warning about hidden dangers of buy-now-pay-later

The Better Business Bureau (BBB) of Washington has issued a warning to back-to-school shoppers concerning buy-now-pay-later (BNPL) payment programs. BNPL has become a popular way of paying for things because of the perception that it is a no-cost way of deferring payments. The BBB of Washington pointed out that there are some hidden risks to these programs. First, hidden interest charges and/or late fees can make these payment programs very expensive to borrowers who do not make their payments promptly. Second, while payments into BNPL programs won’t typically help a consumer build credit, missed payments could count against their credit score if referred to a collection agency. See full article at King5.com.

5. Key indicator signals slowing inflation

The Personal Consumption Expenditure (PCE) Price Index, which measures the prices consumers are paying for goods and services, declined by 0.1% in July. However, the index is still up by 6.3% over the past year. Though less well-known than the Consumer Price Index, the PCE Price Index is an influential inflation metric. The Federal Reserve often cites it as a truer indicator of inflation conditions. Easing price pressures could slow the pace of Fed rate increases, though a single month’s data probably won’t do much to change the upward course of rates. See full release at BEA.gov.

6. German central bank issues bleak forecast

The Bundesbank, which is the central bank of Germany, issued a report saying that a recession in that country is increasingly likely. It also said inflation could rise to double-digits this fall. A major cause of both the slowing economy and inflation in Germany is tight supply of natural gas. Russia has cut its gas exports to Germany in response to sanctions over its invasion of Ukraine. Much of Germany’s industrial economy is highly dependent on power fueled by Russian natural gas. See full article at Reuters.com.

7. President Biden announces partial student loan forgiveness

With an August 31 deadline for federal student loan payments to resume looming, President Biden announced on August 24 that the deadline would be extended until December 31, 2022. He also gave people with student loan debt something even better – partial forgiveness of the amount most borrowers owe. The new plan will forgive up to $10,000 in federal student loan debt for people making less than $125,000 a year. The debt amnesty limit will be $20,000 for people who received Pell Grants. See full article at MSN.com.

8. U.S. economy did better in 2nd quarter than originally thought

The Bureau of Economic Analysis (BEA) issued an improved estimate of second quarter GDP growth. The new estimate is that the economy declined at a real (inflation-adjusted) annual rate 0f 0.6% in the quarter. The original estimate was that it declined at a real annual rate of 0.9%. In other words, the economy declined by less than originally thought. This smaller decline adds to the possibility that the economy might not yet be in a recession despite two quarters of declining GDP. The BEA routinely issues three estimates of GDP each quarter, honing its calculations as more data become available. This is the second of its three estimates of second-quarter GDP. See full release at BEA.gov.

9. Clothing retailers cut prices amid lagging sales

Clothing may be the odd man out in this year’s climate of rising prices. While inflation has soared, a number of clothing retailers have recently announced price cuts and/or lagging sales. The price cuts are in response for demand not keeping up with inventory. Old Navy, Gap, Abercrombie & Fitch, Victoria’s Secret and Kohls are among the clothing retailers that are struggling to deal with weak demand. One theory is that essential costs such as food and energy have risen so much over the past year that households are forced to cut back on discretionary clothing purchases. See article at Reuters.com.

Weekly News Headlines from Credit Sesame

• Last week’s news roundup August 20, 2022
• Next week’s news roundup September 3, 2022

The post Personal Finance Weekly News Roundup August 27, 2022 appeared first on Credit Sesame.

1. Inflation accelerated in May
2. Consumers using financial apps more and enjoying them less
3. Elon Musk sounds alarms about Tesla and the Economy
4. Apple gets into the Buy Now Pay Later game
5. Brookings Institute takes credit card payments to task
6. Poorer Americans gain ground in net worth
7. Jobless claims continue upswing
8. Consumer borrowing rising fast

1. Inflation accelerated in May

After easing a bit in April, inflation returned with a vengeance in May. The Bureau of Labor Statistics reported that the Consumer Price Index rose by a full percentage point during the month. That brought the inflation rate for the past twelve months up to 8.6%. Energy costs continued to lead the surge in prices. Fuel oil prices were up by 16.9% in May alone. That raised their total increase for the past twelve months to 106.7%, meaning that the price of fuel oil has more than doubled in the space of a year. See full report at BLS.gov.

2. Consumers using financial apps more and enjoying them less

A new JD Power study found that consumers are using banking and credit apps more. However, as they become more familiar with these apps, they are judging them more harshly. The study found declining consumer scores across multiple categories: banking apps, bank websites, credit card apps and credit card sites. National bank apps suffered the steepest drop in public opinion. Consumers also took a worsening view of their own financial condition. The study found that the percentage of people describing themselves as financially healthy dropped from 53% to 43%. Those describing themselves as financially vulnerable rose from 25% to 32%. See press release issued by J.D.Power.

3. Elon Musk sounds alarms about Tesla and the economy

Count Elon Musk among those who are bearish about the economy – or at least about his own company. The Tesla CEO sent e-mails to company executives saying he has “a super bad feeling” about the economy. He ordered them to pause all hiring worldwide. He also said the company has become overstaffed and will reduce headcount by 10% of Tesla’s 100,000 employees. Tesla’s stock took a heavy beating in response to the news, dropping 9% on the day after the e-mails were reported. See story at Reuters.com.

4. Apple gets into the Buy Now Pay Later game

Apple announced that it will be launching a Buy Now Pay Later (BNPL) service called Apple Pay Later. It will be available through Apple Pay in the Wallet app. The news comes as BNPL industry leaders are struggling following a period of rapid growth. BNPL firms have recently reported disappointing financial results and layoffs while the sector has attracted increased regulatory attention. Apple’s entry only complicates the competitive landscape for more established players in the BNPL space. Read full article on Yahoo.com.

5. Brookings Institute takes credit card payments to task

A new study by the Brookings Institute criticizes the credit card industry for encouraging consumers to accumulate debt and maximize interest charges. The focus of their criticism is the method used to determine minimum payments on credit card debt. According to Brookings, this approach results in artificially low payments. Those low payments cause debt to take an abnormally long time to be paid off, resulting in higher interest charges. The study found that with a typical minimum payment formula at recent interest rates, a $3,000 credit card balance would take 11.5 years to pay off. Over that time, the consumer would incur $3,154 in interest charges, on top of the $3,000 original debt they’d have to pay back. See full study at Brookings.edu.

6. Poorer Americans gain ground in net worth

The lower half of American households by net worth have been building wealth more quickly over the past two years than their richer counterparts. The total wealth of the bottom 50% of Americans by net worth has almost doubled in the past two years. That’s a faster rate of gain than any other net worth group. Households in the bottom half of wealth have made longer-term gains as well. Their total wealth is more than 10 times what it was in 2011, and represents a higher share of the nation’s wealth than at any other time in the past 20 years. See article at Bloomberg.com.

7. Jobless claims continue upswing

The Department of Labor announced that new unemployment claims rose last week, reaching their highest level since January. This continues a general rising trend in unemployment since jobless claims bottomed out in March. However, this trend is not yet considered cause for concern. Jobless claims are only slightly above where they were prior to the pandemic. Also, the overall unemployment rate remains low. In fact, a cooling of hiring demand might ease some of the inflationary pressure from labor shortages. See article at Yahoo.com.

8. Consumer borrowing rising fast

Consumer debt outstanding reached a record level in April, following a third straight month of increases in excess of $30 billion. Revolving credit grew at more than twice the rate of non-revolving credit. Revolving credit is mostly credit card debt, while non-revolving credit represents term loans. A high growth rate of revolving credit is disturbing because this type of debt will be most immediately affected by rising interest rates. See MSN.com.

Weekly News Headlines from Credit Sesame

• Last week’s news roundup June 4, 2022
• Next week’s news roundup June 18, 2022

The post Personal Finance Weekly News Roundup June 11, 2022 appeared first on Credit Sesame.