June 1, 2023

Debt piled up because of buying on installments

AmericaNo longer a convenient alternative to shopping, buying first and paying later makes many young people spend all their savings and also fall into debt.

At the age of 18, Sarah Pfefferle saved $16,000, planning to buy a house. But three years later, the plan fell through when the girl from Chicago, Illinois was $5,000 in debt from three of the installment loan companies.

The large principal balance along with some unexpected medical expenses consumed most of Sarah’s savings, forcing her to seek help from a financial advisor. But as a result, after closing all the accounts, her credit score dropped from 720 to 580. She said her plan to buy a house was delayed by at least two years and was afraid of not being able to get a mortgage.

“I have almost no savings left for emergencies. It’s a vicious cycle,” Sarah said.

Sarah Pfefferle spends most of her savings on buying a home using the buy-in, pay-later method. Image: Bloomberg

But Sarah is not the only case of falling into heavy debt.

Afterpay company in Australia introduced the concept of “Buy now pay later” (BNPL) as a financial product that allows consumers to pay for purchases in four installments with little or no commitment to charge additional fees. Interest-free and fast credit approval. This is considered by young consumers as a great shopping solution because of their limited financial potential.

Several pioneers in the field, including Afterpay, Klarna Bank AB and Affirm Holdings Inc., have teamed up with trendy clothing retailers and social media influencers to bring the policy. become popular on apps and online payments. In particular, every time a consumer chooses to buy first pay after payment, the seller will pay a fee to this company.

According to a September 2022 report from the US Consumer Financial Protection Bureau (CFPB), short-term loans became popular during the pandemic. The 5 major BNPL companies created 180 million loans with a total value of 24.2 billion USD in 2021, an increase of nearly 10 times compared to 2019. The commitment to interest-free payments makes financial products BNPL itself becomes attractive to Gen Z – those who are wary of credit cards or have witnessed relatives struggling during the financial crisis.

Ed Mierzwinski, senior director of the US Public Interest Research Group, said BNPL’s marketing is targeting young people who have little experience with spending money because they haven’t been in the financial markets long enough. “But buying first, paying later is only really free if consumers follow the rules,” said Ed Mierzwinski.

The CFPB found that young people are more likely to default or be sent to a third-party collection agency. Accordingly, about 11% of borrowers have paid at least one late fee by 2021, up from last year. 18% of 18- to 29-year-old consumers have reduced payments by 2021, according to a Federal Reserve report. On social media, some accounts recently shared about avoiding payments or outstanding balances that they could not pay off.

On the other hand, in an emailed statement, Afterpay, Klarna and Affirm all say they offer users more protections than credit cards, while stressing that they don’t charge interest or late fees. .

Financial experts warn that the policy of buying first, paying later, causes many young people to spend beyond their means and fall into debt.  Photo: Brent Lewin / Bloomberg

Financial experts warn that the policy of buying first, paying later, causes many young people to spend beyond their means and fall into debt. Image: Brent Lewin / Bloomberg

Using a new form of payment makes 19-year-old Gabrielle not feel like she is spending money because for weeks she has not received a notification that she needs to pay for pre-paid and post-paid purchases. Not to mention, the more money she spends, the more credits she gets.

More than a year after using the new payment method, in addition to new clothes and makeup, Gabrielle also has $3,500 in debt.

A FinTech Association poll found that 40% of BNPL users have borrowed money from multiple providers. Nearly a third reported spending more than they had, according to figures from the Financial Health Network.

For some people, paying off debt on time can have lasting consequences. Briana Gordley, 24, of Texas, didn’t anticipate the potential pitfalls when she first saw the ad for postpaid purchases in 2016.

As someone who has had to pay for college on her own and has been turned down by credit card providers, Briana sees these financial products as a safe way to pay for fees she can’t afford with a dollar. meager overtime pay. But after just 18 months, she was $1,500 in debt across three platforms, forced to ask her parents for help, before building a new savings account and starting to pay off student loans.

Some major credit bureaus say they will start offering “buy now pay later” transactions and consumer credit reports, although not all lenders report the data to them. . Loans sent to debt collectors may also be reported, although this will affect a consumer’s credit score.

In September this year, Briana told the US Senate Banking Committee that BNPL is aimed at young borrowers who are learning how to manage their own personal finances. “I understand and take responsibility for the decisions I’ve made, but this is a two-way relationship, meaning that consumers and businesses must work together to achieve the desired results,” the girl said. 24 years old said.

Minh Phuong (According to Bloomberg)


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