‘Buy Now, Pay Later’ Borrowers Get More Safeguards With New Rule

Borrowers of the popular “buy now, pay later” installment loans should find it easier to dispute charges and get refunds under a new rule announced by the federal government last week.

The Consumer Financial Protection Bureau, which has been scrutinizing the alternative loans for more than two years, ruled that “buy now, pay later” lenders were credit card providers and had to offer borrowers some of the same safeguards that conventional credit cards provided. Those protections give borrowers the right to dispute charges and halt payments while their complaints are investigated, and to get refunds for returned items. Lenders must also provide billing statements.

The bureau issued its findings as an “interpretive” rule, meaning it stated its own interpretation of existing law. “Regardless of whether a shopper swipes a credit card or uses ‘buy now, pay later,’ they are entitled to important consumer protections under long-standing laws and regulations already on the books,” Rohit Chopra, the director of the bureau, said in a statement.

The loans, digital versions of old-time layaway plans, are commonly known as “pay in four” because they’re often advertised as purchases that can be split into four payments over six weeks. Shoppers can get a quick approval for the loan at checkout, often with a minimal credit check, and pay zero interest. Some lenders charge late fees for missed payments, while others simply cut off borrowers from new loans until they pay.

Some card protections under the Truth in Lending Act don’t apply to the alternative loans, the consumer bureau found. Those include a requirement that card lenders assess a borrower’s ability to repay a debt before making a loan, and limits on penalties like late payment fees.

“Those are a number of remaining concerns,” said Jennifer Chien, a senior policy counsel for financial fairness at Consumer Reports.

Still, consumer advocates applauded the rule as a win for pay-later shoppers. “It’s a step forward,” said Lauren Saunders, associate director at the National Consumer Law Center. “Previously, it wasn’t clear what rights you had.”

“Buy now, pay later” loans, widely available online, surged in popularity when people flocked to online shopping during the coronavirus pandemic. In 2023, a report from the Federal Reserve Bank of New York found that 64% of people surveyed had been offered a pay-later option at least once, while 19% had used it as a payment method.

To qualify for a pay-later loan, you generally have to be at least 18 years old, have a mobile phone number and have a debit or credit card or bank account to make payments, which are usually deducted automatically.

“‘Buy now, pay later’ is now a major part of our consumer credit market,” Chopra said during a call with reporters, adding that the loans provided a “meaningful alternative” for consumers.

The loans were initially offered for clothing and beauty items, but they have expanded to an array of products and services, including necessities like groceries and gasoline as well as bigger-ticket items like furniture and travel. Providers include Affirm, Afterpay, Apple Pay Later and Klarna. (The new rule applies to pay-in-four loans, and not to more traditionally structured loans that pay-later lenders may also offer, consumer bureau officials said in the press call.)

Penny Lee, the president and CEO of the Financial Technology Association, an industry group that represents some of the largest pay-later companies, said in a statement that the group’s members, which include Afterpay and Klarna, “are committed to strong consumer protections,” including the right to dispute charges and get refunds.

In a statement, Phil Goldfeder, the CEO of the American Fintech Council, an industry group representing financial technology companies including Affirm, said the bureau’s rule provided “vital clarity” to lenders. Council members that offer “buy now, pay later” loans have already been complying voluntarily with the provisions specified by the bureau, he added.

Even if some lenders already offered the protections, bureau officials said in the press call, the rule makes clear that they are mandatory and have to be consistently applied. Officials said they continued to receive complaints about problems with returns.

The consumer bureau began studying “buy now, pay later” lenders in 2021 and, in a report in 2022, raised concerns about the loans, including the risk that borrowers could overextend themselves by taking out multiple loans at the same time, and problems that shoppers were having when they tried to return purchases.

Here are some questions and answers about “buy now, pay later” credit:

Q: When does the rule take effect?

A: The rule takes effect 60 days after its publication in the Federal Register, the official journal for federal rules and regulations. It is scheduled to be published on Friday. The bureau said it would take public comments on the rule until Aug. 1, and would use them to help decide if clarifications or more rules were needed. You can submit comments online.

Q: Can ‘buy now, pay later’ loans help build my credit history?

A: Despite years of talk, most lenders still don’t report pay-in-four loans to Equifax, Experian and TransUnion, the big credit bureaus that collect payment data used by lenders to decide whether a borrower is creditworthy. Some lenders and consumer advocates said they worried that if these loans were reported, the pattern of the debt, in which borrowers opened and paid off multiple short-term loans, could mar consumer credit under the formulas the bureaus used to assess risk.

But things may be changing. In February, Apple Pay Later said it would begin reporting pay-in-four loans to Experian; Max Levchin, the chief executive of Affirm, said he expected the company to eventually report to Experian as well. Experian said it included pay-later loans in credit reports requested by consumers and would eventually make them available to lenders, but the company didn’t yet factor them into credit scores — the three-digit numbers that summarize a consumer’s credit file. TransUnion said that it was ready to accept pay-later data and would eventually make it available to lenders, but that it didn’t include the loans in credit reports or factor them into scores. Equifax said that it had been able to accept information on pay-in-four loans for more than two years and encouraged lenders to report such payment data, but that none were currently doing so.

Q: How can I reduce the risk of using ‘buy now, pay later’ financing?

A: Chien at Consumer Reports advised against taking out multiple loans at the same time. Borrowers with four or more concurrent loans are twice as likely to miss a payment, she said. She also recommended setting up automatic payments; while you may think paying manually offers more control, it actually increases the chance you’ll miss a payment. Use a debit card or bank account to make payments, not a credit card, she said. If you don’t pay the credit card balance in full, you could end up paying double-digit interest on what was supposed to be an interest-free loan.

This article originally appeared in The New York Times .