Australian financial experts wrote a report in November that found 20% of app users surveyed "cut back on or went without essentials" to make their payments on time. The United Kingdom released a nearly 70-page report in February concluding that "urgent and timely" regulatory changes were needed.
U.S. regulators say they are aware of the services but are exercising caution. "We're really interested in use cases of buy-now-pay-later where perhaps a consumer that would otherwise go to a payday lender and pay a very high cost for a loan might be able to use it," said John McNamara, principal assistant director of markets at the Consumer Financial Protection Bureau.
In July, the CFPB released a blog post titled "Should you buy now and pay later?" warning consumers that the apps can charge late fees, report to credit bureaus and do not offer the same protections as other credit products.
Laura Udis, who manages installment loan programs at the CFPB, said the apps are subject to the Dodd-Frank act, passed in 2010 after the subprime mortgage crisis to prevent unfair, deceptive and abusive practices by lenders. She said the law "should be flexible enough to apply to any particular credit situation, including new innovations like buy-now-pay-later."
But the services have found loopholes in regulation.
For instance, the Truth in Lending Act, which requires lenders disclose the terms and costs of services, states that payment plans of fewer than five installments are not subject to ad disclosure requirements as long as they avoid certain terms.
Consumer advocates say that explains why many apps are structured as four installments. And the companies help merchants avoid terminology that would trigger greater disclosures.
Affirm offers its merchant partners a guide. Quadpay has a variety of promotions for merchants to download that won't trigger disclosures.
An Affirm spokesperson said the company provides information to users at checkout, including disclosures that would be required by the Truth in Lending Act, to ensure customers are informed. A Quadpay spokesperson said the company makes "every effort to help consumers by providing fair, flexible and transparent payment terms."
Ira Rheingold, executive director of the National Assn. of Consumer Advocates, said it may take time for regulators to sort out how lending laws apply to the services, and whether new ones are needed.
"I think there are different ways that regulators can deal with them," he said. "And I think that there's some places where they'll be far behind and some places where they won't be."
Lawmakers show no signs of getting involved. Spokespeople for multiple congressional committees said they were not considering regulating the apps.
California's regulators are among the few U.S. watchdogs that have taken substantive actions against the services. In 2019, the state's Department of Business Oversight, now the Department of Financial Protection and Innovation, sued Sezzle, Afterpay, Quadpay and Klarna for making illegal loans.
Each of the companies ultimately settled and had to get licensed, refund fees collected from Californians and pay fines.
"Today, the buy-now-pay-later companies we license in California are required to take into consideration a borrower's ability to repay the loan and are subject to strict rate and fee caps," department spokesperson Maria Luisa Cesar said.
As regulators and lawmakers determine how best to keep up with the growth of the apps, their popularity endures. Voechting, Hunt and Conn all said they will continue to use them.
"It's kind of nice to be able to say, 'Oh, you know, I can't afford to buy this right upfront, but I can split it up into four payments and afford it that way,'" Conn said.
Before the apps, Conn would spend weeks saving money for special purchases. The apps allow her to get products immediately. Said Conn: "Why not just buy it?"
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