Payment history is often not reported

BNPL companies generally do not report to credit rating companies when consumers use these loans. That makes it challenging for a lender to know how many loans a consumer has outstanding.

“That makes a big difference in terms of how much you have to lend,” said Kenneth Lin, CEO of fintech firm Credit Karma. “Often a credit system is actually blind to how much you owe in the Buy Now Pay Later scenario.”

Consumers with multiple BNPL loans with multiple payment dates may find themselves spiraling into debt. “That’s when people get into serious trouble,” Lin said.

Difficulty building a credit history

“When it comes to your credit, everything is negative and not positive,” said Matt Schulz, senior credit analyst at LendingTree.

Since BNPL companies generally don’t report a positive payment history, “it’s really risky because you can’t build up your credit and show the banks that you’re credit worthy,” he added. “On the other hand, if you slip up, many times that mistake will be recorded and that can have a negative impact on your credit.”

About 35% of consumers said they were at least considering using a purchase now, pay later loan last month, according to Lending Tree. Another survey found that 42% of BNPL users said they had paid one of these loans late.

The impact of late payments varies

Krisanapong Detraphihat | Moment | fake images

Experts say that BNPL lenders may handle late payments differently.

For some, you end up receiving fees. For others, they simply cut you out of service for the future and won’t serve you back, Schulz said. Some companies will report delinquencies to credit reporting companies, while others will not.

Meanwhile, the Consumer Financial Protection Bureau has opened an investigation into how BNPL lenders use consumer data and report that information. “The problem is that when they use buy now, pay later for more and more expenses, including groceries and other purchases at the store, they can run up a lot of debt,” CFPB Director Rohit Chopra said in an interview with CNBC.

“The key piece is to make sure that we’re not creating a system that…sends people down a spiral of debt that they ultimately can’t pay.”

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