Although many consumers use buy now, pay later (BNPL), this option has left some borrowers feeling dissatisfied, confused and even suspicious of the service, according to a new survey from Zilch.
Buy now, pay later options have risen in popularity over the past few years, boasting more than 8 million total U.S. monthly users as of December 2021, according to Payments Dive. Zilch’s survey said that 31% of consumers have used a BNPL service.
BNPL providers — such as Affirm, Klarna, Afterpay, Sezzle and Paypal — partner with retailers to allow shoppers to split the cost of their online purchases into multiple installments at checkout. These interest-free payments are then generally due within a few weeks after the time of purchase. But while companies don’t charge interest with this financing option, missed payments can result in late fees and other penalties.
Zilch's survey said there is a "widespread lack of understanding" about how BNPL companies earn money. Forty-three percent of consumers said they believe BNPL companies make their money on the interest they collect, while 26% said they believe it's through a price mark-up of the products. Another 21% said BNPL providers make their money through hidden fees and 31% of respondents said they didn't know.
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Zilch compares BNPL to credit cards
While credit cards remain a common way for consumers to finance their purchases, about 50% of those surveyed said they needed other financing options. And 54% of these consumers said credit card companies have too much of an impact on their credit score.
High credit card interest rates also came into play, with 40% of consumers saying their credit card charges more than 12.99% annual percentage rate (APR) in interest. Another 26% said they didn’t know how much interest they were paying.
"It’s a crucial point of differentiation that many BNPL providers, including Zilch, do not charge interest while credit cards stand to jeopardize the financial well-being of consumers with high interest rates and balloon payments," Zilch CEO Philip Belamant said.
"According to the Consumer Financial Protection Bureau, Americans paid $120 billion annually in credit card interest and fees between 2018 and 2020, equating to $1000 each year per household," Belamant said. "The fact that nearly half of consumers believe that all BNPL providers charge interest when they absolutely do not, is not only concerning, but can be significantly detrimental to consumer health."
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Consumers struggling to secure other loans blame credit cards
About 76% of consumers who have had a hard time getting approved for other types of loans blamed credit cards, according to Zilch. About 26% of those having trouble said it was because they defaulted on a credit card for less than $2,000. Another 30% said it was because they paid their credit card bill late less than three times and 19% said it was because a merchant incorrectly charged or reported a transaction.
"Half of all respondents believe consumers need options beyond expensive credit cards which is exactly what we are trying to solve for, but the prevalent confusion and lack of understanding of how BNPL companies operate in general and compared to one another is a grave concern," Belamant said.
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