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Beware: A New Loan Shark Lurks
Consumer Convenience Carries Consequences
Consumer advocates are warning people to beware of credit products that make life easy for consumers but also carry significant risks. Specifically, advocates are suggesting that buy now, pay later products (such as Klarna and AfterPay) and earned wage access products (Even, for example) can come with high fees and interest rates rivaling payday loans.
The ability for an employee to access wages early can be a way to manage unexpected expenses without expensive credit, bank fees, or a payday loan. However, consumer advocates say early wage access (EWA) products can carry high costs and act in ways that are similar to payday loans.
The issue has taken on more importance as workers increasingly use earned wage access (EWA) services. U.S. households tapped such services nearly 56 million times last year for about $9.5 billion in pay under such employer-based programs, according to estimates from research firm Aite-Novarica. In addition, millions more have downloaded apps that provide cash advances on their pay without employer participation, the firm said in a February report on the trend.
The services “are just a kinder version of payday loans,” National Consumer Law Center (NCLC) Associate Director Lauren Saunders said.
In fact, Saunders testified before a House Financial Services Committee Task Force recently about the potential dangers of EWA products.
“Earned wage access products are a form of payday loan — wage advances repaid on payday — and should be regulated as credit,” Saunders said.
Buy Now, Pay Later
“Buy-now-pay-later products, if affordable and truly free to the consumer, may help consumers manage larger purchases without the long-term debt and high costs of credit cards. But some BNPL products may have deceptive and abusive profit models built on the expectation of late fees from struggling consumers.
When they operate as promoted, BNPL can help consumers manage larger purchases without the long-term debt and high costs of credit cards. There are real benefits to being able to pay on credit with clear, simple payments that will quickly pay off the purchase at no greater cost than paying in cash.
There are troubling indications that BNPL products may lead consumers to incur debt they cannot afford to repay. Disturbingly, part of the business model of some BNPL providers may count on consumers who do not pay on time and who incur late fees.
BNPL providers do not directly consider the consumer’s ability to repay. Even if they check do a soft check of credit reports, those reports may not reveal BNPL debt. Industry analysts have warned that BNPL providers may underestimate consumers’ debt levels and may be headed for even higher default rates
Digital Currency: The Future is Now | by Andy Spears | Nov, 2021 | Medium