Buy Now Pay Later Loans Could Be A Cause For Concern
Traditionally, when consumers or businesses needed credit, they were left to have to get credit through loans, credit cards, and other large lenders. But a new trend has emerged, in what is known as buy now pay later (BNPL). These hybrid types of loans can be tempting when your business needs a quick infusion of money, but they have their pros and cons when it comes to borrowing money for your business or for you personally.
How the Loans Work
Traditional lending operates on interest; the lender affords you payments over an extended period of time and makes its money off of the interest you pay. As a result, for that financial flexibility, you pay way over the principal amount when you’re done paying the loan off.
BNPL loans don’t have the long term flexibility that traditional loans do—often, repayment is made in 3-5 payments. But for moderate priced purchases, or for businesses that can afford a large expense in a few payments, the BNPL loan has the benefit of paying less interest than you would be charged in a traditional loan arrangement.
Many BNPL loans even tout their willingness to waive a late payment, or will refrain from charging late fees for a late payment.
Credit Problems With BNPL Loans
But you and your business should be wary, because these kinds of loans fall into an industry that is largely unregulated.
Many of these loans are reported to your credit, the way that normal loans are; the good is paying them back can help your credit, but just having the loan can hurt your credit, as they affect your debt to income ratio, and of course, late payments can be reported to your credit.
Additionally, the shorter repayment period, while a benefit in terms of interest, doesn’t help your credit; paying off a loan over time tends to help credit more than shorter term loans do. Additionally, about 10-20% of your credit is based on the average length of your accounts, which means that constantly taking out BNPL loans and paying them off, while it may seem like a great thing for your credit, can actually hurt your score.
Returns and Refunds
Making BNPL loans more suspect, is that many reports indicate that many companies don’t know how to handle customer refunds of items. Unlike a traditional credit card, where you just return an item to the store, with BNPL loans, you may need to contact both the store and the lender. You may even have to continue to make payments until the return is approved. Often, interest that was paid, is not refundable.
You also don’t get the protections that you do with traditional lenders or credit cards, such as the ability to contest a charge if what you purchased isn’t what you received.
Call the West Palm Beach commercial litigation attorneys at Pike & Lustig today if you have a question about any business law related matter.