How well do consumers understand BNPL services?

The idea of making purchases in multiple installments without incurring any interest apparently presents buy now, pay later (BNPL) as a clean winner over traditional credit options. However, the still relatively nascent space comes with risks, fees, and policies that may vary across different lenders. 

Many of the 79 million US BNPL users are still in the dark when it comes to terms of service associated with BNPL loans, according to a new survey by The Motley Fool Ascent. 

Source: The Motley Fool

Last year, 7% of consumers ranked themselves a 1, indicating that they don't understand BNPL offering at all, while 37% ranked themselves a 5, showing that they think they are well-informed about the nitty-gritty of the service. While the statistics show an increase in consumers’ understanding year-over-year, it still lags pace with the increasing rate of BNPL usage. The remaining majority of 63% of respondents come under the consumer segment that is unsure whether BNPL means running into debt or deferring payment. 

Source: The Motley Fool

The survey also highlights that the younger cohort (18-24 years) has the most pronounced preference for BNPL services and at the same time outranks (33%) other age groups when it comes to its lack of clarity surrounding BNPL terms. This primarily stems from the paucity of financial literacy across the board and also the fact that younger shoppers generally consent to terms of service in the blink of an eye without reading them thoroughly.

It seems likely that a lot of people only skim through those sections, or entirely skip the small print. In fact, 77% of consumers admit they do not read the terms and conditions of the financial apps they use.

Part of this conundrum is due to a lack of clear communication from BNPL lenders, including passing on information on risks consumers should consider before entering into a BNPL arrangement, understanding repayment terms to which they are agreeing, and the penalties that can follow.

Source: The Motley Fool

BNPL platforms typically market zero-interest payment plans, which holds true for a majority of lenders. However, it can be a bit more ambiguous than that. And that’s a problem. 

For example, when customers are charged fees on late or missed installment payments, they may be reported to credit bureaus – that might eventually impact their credit history and credit scores negatively. Additionally, a bank may charge an overdraft or non-sufficient fund fee if a borrower signs up for automatic repayment through their debit card or bank account and end up lacking sufficient funds to cover the payment. In other cases, a consumer can also be completely blocked from using the BNPL loan to make future purchases until their outstanding payments are cleared.

While lenders can provide clear communication around their respective BNPL products/loans and the effect it can have on a customer's credit file, as simple as reading the fine print of the BNPL service before opting to use it can be one of the ways consumers can steer clear of various other fees that can be charged without prior consent.