Blumenthal Slams “Buy Now, Pay Later”

by Dereen Shirnekhi

As the holiday spending season begins, U.S. Sen. Richard Blumenthal called on consumers to be wary of plans that let them buy now and pay later — which, he said, might be too good to be true.

Blumenthal delivered that message on Monday from Broadway Triangle, in the center of Yale’s shopping district. He came to “warn and draw attention” to the practices of Buy Now Pay Later (BNPL) companies, which make loans to consumers that they typically pay off in four automatic interest-free payments.

Blumenthal cautioned that, while consumers can pay less upfront thanks to these lending plans, BNPL companies can still charge interest rates for missed or late payments, leading consumers to be “slammed with huge fees” that can cost consumers “much more than ordinary credit would.”

“A holiday splurge could be a new year scourge,” said Blumenthal, who often focused on consumer issues as Connecticut’s attorney general before he became a senator. He said that use of BNPL plans is “skyrocketing,” and they increased in number and usage by almost 1,000 percent between 2019 and 2021. One in five consumers use these plans, according to Blumenthal, and about 91.5 million Americans this year will use a BNPL plan. Increasingly, consumers have been using these plans to buy essential items, “like groceries, or rent, or even to pay back debt.”

Blumenthal emphasized that these plans are unprotected under normal credit safeguards. The Trump administration has gutted the Consumer Financial Protection Bureau’s ability to regulate BNPL companies under the Truth in Lending Act, he said, and has rescinded a proposed rule that would have made these Buy Now Pay Later plans protected, “just like your credit is protected.”

This opacity around BNPL plans has made it so that there’s little information regarding the risks associated with these plans, or how widespread their usage is. On Nov. 19, Blumenthal and Sens. Elizabeth Warren, Cory Booker, Tammy Duckworth, and Mazie Hirono sent letters to seven major companies that provide BNSL services: Klarna, Afterpay, Affirm, Sezzle, Zip, PayPal, and Splitit. In their letters, the senators call on each company “to provide data on their BNPL products, their users, and their role in the broader economy” no later than Dec. 9. Blumenthal said he hopes to hear back this week. Each letter can be read in full here.

A spokesperson for BNPL lender Klarna said that late fees are capped at “$7, or 25 percent of the installment value, whichever is lower, and consumers receive a 10-day grace period before any late fee is applied.” A Nov. 21 company blog post responds to the Nov. 19 letter bills BNPL plans as an alternative to the $1.23 trillion in credit card debt shared by Americans.

“In direct contrast to a traditional credit card company, we assess eligibility before every purchase and immediately pause a consumer’s access to credit if a payment is missed. As a result, 99% of our lending is repaid—a repayment rate that speaks to both our underwriting standards and the responsible behavior of our customers,” the blog post reads. “The average Klarna customer in the U.S. has an outstanding balance of $87, compared to $6,730 as the average balance of credit cards in the U.S.”

The average loan for a BNPL plan is $135, according to Miranda Margowsky, head of communications for Financial Technology Association Head of Communications, which represents Afterpay, Klarna, PayPal, and Zip. There can be a gradual credit increase over time.

Unlike credit card lenders, Margowsky said, BNPL lenders do not charge interest on top of interest, and late fees are capped. If a consumer finds that they’re unable to pay the rest of the plan, “providers will work with people if they reach out and ask for help,” she said. If the bill doesn’t get paid, they are blocked from using that particular BNPL service in the future. As of right now, they would still able to use another lender.