Buy Now, Rate Later?
It is a good thing that new consumer credit products are affording consumers access to credit for what they want or need. But as The Wall Street Journal notes, so-called “Buy Now Pay Later” products are not offering consumers one of the most important hallmarks of traditional installment loans, which they are sometimes compared to: the opportunity to improve one’s credit score.
For consumers with prime credit scores, such reporting may not be important, or the reporting of a BNPL might even ding someone with a prime score because it is a new account for a consumer with several other credit accounts on record. But for consumers with subprime scores able to take advantage of a BNPL, a positive report of full repayment would help their credit standing. As the Journal notes, the BNPL industry is studying its data to better understand how to mitigate this ratings quirk in their processes. But this article reinforces two important points:
First, traditional installment loans, which average about $1500, are a safe, reliable credit option for consumers, particularly those with subprime credit or no credit history. Traditional installment lenders evaluate customers for their ability to pay and they report performance to credit bureaus, affording subprime consumers the opportunity to improve their credit standing. They’re fully amortized and there are no hidden, balloon or prepayment fees. Most of all, traditional installment loans have been a known quantity for more than a century, not a flavor of the month, and that counts for something.
Second, the article also highlights the need for regulators to understand the unique nature of BNPL products when considering how best to regulatory them. This is a good example where a “one size fits all” approach is unhelpful, not only for BNPL, but for the broader consumer credit industry. Traditional installment loans are not BNPLs and shouldn’t be lumped with a nascent product that regulators are still attempting to understand, as are, apparently, the Buy Now Pay Later players themselves.
October 17th, 2022
