The downsides of expanding plans Buy now, pay later

Failing to repay a BNPL loan on time can hurt a client’s credit rating, something New York resident Alana Cimillo says she learned the hard way.

In 2019, Cimillo learned that her ex-fiancé had used her Social Security number without her knowledge to take out 23 loans from Affirm, a lawsuit alleged in November, allegedly failed to repay. fully 18 of them.

It wasn’t until she heard about a collection agency retained by Affirm that Cimillo realized the extent of the problem, according to the lawsuit. Cimillo reported what she describes as identity theft to police and disputed the loans directly with Affirm several times throughout 2020. But Affirm ultimately concluded that the loans were valid and that Cimillo was responsible for pay them, according to the lawsuit. (CR does not name the ex-fiancé as he has not been criminally charged.)

In mid-2021, according to the lawsuit, Cimillo received alerts that her FICO credit score had dropped from nearly 800 to 674. She felt the effect when she went to buy a car in July and learned from the dealership that she was not eligible for the 0.9% promotional interest rate for auto loans, “and that the best interest rate she could get would be 4.9%,” according to his complaint.

Affirm declined to comment. Adam Singer, Cimillo’s attorney, declined to comment specifically on the case, citing ongoing litigation, but he says it’s concerning that consumers can get so many BNPL loans at once. He wouldn’t be surprised, he says, if someone lost track of payment schedules, given the potentially large number of loans, and if one of them became delinquent, the consumer would likely see a impact on their credit rating.

“They might have great credit, but all of a sudden they might now have serious delinquency,” he says.

Policies on whether delinquent loans are reported to a credit bureau vary by lender. Afterpay and Klarna, for example, say they don’t report missed payments to the credit bureaus, while Affirm says some defaults are eventually reported.

While Cimillo’s case is an extraordinary example of how small BNPL loans can cause problems for a consumer, CR’s Bell says his situation underscores the potential risks of making payment plans available to pay virtually anyone. what.

“The popular image of BNPL loans is that borrowers use them selectively to purchase one or a few items at the same time,” he says. “But some users were able to stack multiple loans, like a revolving line of credit.”

“Some BPNL products allow you to spend up to a high credit limit, but unlike credit cards, they are not regulated to require a repayment capacity assessment or to provide regular consolidated billing statements,” adds he. “The borrower might be underestimating the risk of charging a lot of purchases to their account.”