What you need to know about interest-free payment plans

Read the Full Transcript

• John Yang:

  As inflation remains high, many consumers are looking at new ways to pay for the things they want. One that's gaining popularity is buy now, pay later. Companies like Affirm, Afterpay and Klarna allow customers to take an item home right away and pay for it later in interest free installments. But it's only free if you follow the rules. Roben Farzad is co-host of Public Radio's Full Disclosure. Robin, how do these things work and how are they different from using a credit card?

• Roben Farzad:

  These are just splitting up payments into a down payment. Effectively, you imagine a $200 handbag, so you pay $50 upfront and you have maybe two months to pay the rest. Sands interests in other things. So you're asking yourself what's in it for the merchant? Well, the merchant is being promised by these vendors that you're going to get a much bigger size of the shopping cart. And we can also track data and the merchant will pay fees in lieu of interest. So this is to the industry, at least it's innovation and not usury, but the Consumer Financial Protection Bureau and others have kind of caught on because the sector has exploded, especially during the pandemic, and saying, well, maybe there are some usurious aspects, especially if you're layering this onto your credit card and it's buyer beware and, you know, debtor beware.

• John Yang:

  It's growing in popularity during the pandemic. Do we know what kind of consumer, what type of consumer this is popular with?

• Roben Farzad:

  This has been huge with millennials and Gen Z. And if you just take millennials alone, right. Considering the post-traumatic stress of the financial crisis and not being able to get jobs and seeing their parents with subprime and everything else, I mean, time was that the collateralized debt obligations or NBS was also financial innovation. So they might look askance at these credit card teaser rates and other things that, you know, 20 somethings might otherwise see their mailboxes stuffed with. So if you can avoid I mean, it's a panacea if you can avoid credit. And all of its overhang is what with reporting to credit bureaus and and collection agencies and everything, and just take something and divide it up into four. Why wouldn't you do that? The thing is, you really have to read intense fine print. It's different among all of the different buy now, pay later players. And can you indeed get caught up in a vicious credit cycle? And I think a lot of these Gen Z and millennials and the Consumer Financial Protection Bureau are kind of finding this out belatedly. It's always like this game of cat and mouse as it was in subprime.

• John Yang:

  Well, explain how that happens. How are they getting into trouble?

• Roben Farzad:

  I suppose it's linked to your credit card. I mean, so okay, you agree to pay $50 on that handbag? On that $200 handbag, and we're going to take the money from your credit card over, say, two months. But if you're not paying the credit card and you have simultaneously many buy now pay later engagements going on, what you're doing is effectively stacking onto credit. It will recourse back to you if you get reported to a collection agency. A collection agency has to report that to the credit bureau. So you may have bought this initial premise that this is not a credit card, but in the end it ends up hitting you and docking you much like a credit card would because it's linked to your credit card and you're not making payments, especially now if you're going away from kind of vanity purchases into everyday purchases, groceries, things that are costing a lot and credit card interest rates are going up because the Fed has been taking up rates and we're in a higher interest rate environment. It seems like a recipe for a debt spiral.

• John Yang:

  And you talked about warnings. Is this regulated at all?

• Roben Farzad:

  The argument is that it's not as regulated as it should be because, again, it's in the purview of the province of financial innovation and it's supposed to be consumer friendly. A lot of these players are saying we don't want to be like credit card companies. We don't want to be looked at that way. We want to usher in the new era of fintech and and new banking that's kind of consumer facing and friendlier. But there is an underbelly to it. There is an underbelly when people accumulate rolling credit or whatever you want to call it, rolling balances and they don't pay. And these are non-performing and they have to be written off. These are not charitable companies. They're not there to just ad infinitum make zero interest rate credit extensions to people they're going to collect. They're going to write off things that end up in the hands of the collection bureaus. And the credit card companies are going to have to deal with the second order effects. And so, yes, belatedly, you're seeing regulators come to this. You saw a report from the Consumer Financial Protection Bureau that says also we're monitoring how much information is sold because you're tracking everybody real time, their movements. How hesitant were they to consummate the transaction? That's all very profitable information. And end customers, especially younger people, might not know that they are maybe the product and not the customer.

• John Yang:

  Roben Farzad is host of Public Radio's Full Disclosure. Thank you very much, Robin.

• Roben Farzad:

  My pleasure, John. Thank you.

Improved audio player available on our mobile page