Most BNPL loans made to subprime borrowers: CFPB

The Consumer Financial Protection Bureau has found that the majority of buy now/pay later loans were made to subprime borrowers that have high credit card balances and multiple loans.

The CFPB’s research, which was released Monday, comes after the CFPB issued an interpretive rule last May that requires BNPL lenders to provide the same consumer protections as credit cards. It is widely expected that a new acting CFPB director appointed by President-elect Trump will rescind the nonbinding interpretive rule. 

CFPB Director Rohit Chopra has long been interested in the credit implications of BNPL loans, largely because the product was created as a form of regulatory arbitrage to avoid Truth in Lending Act disclosure requirements that apply only to loans with more than four payments. Regulators have had limited insight into the loans because lenders do not report to the national credit bureaus.

The CFPB’s research found that BNPL borrowers were more likely than other consumers to have higher balances on other unsecured credit lines such as credit cards. Nearly two-thirds of BNPL loans went to borrowers with lower credit scores. In 2022, lenders approved 78% of the loan applications made by subprime borrowers. Of concern to the CFPB is that 63% of borrowers took out multiple BNPL loans during the year, with 33% taking out loans from multiple lenders.

Still, consumer use of BNPL products pales in comparison with credit cards. In 2022, 277 million BNPL loans originated by six major lenders with a value of $34 billion — a figure that amounts to just 1% of total consumer spending on credit cards. The bureau in 2023 ordered the six lenders — Affirm, Afterpay, Klarna, Paypal, Sezzle and Zip — to provide information on the no-interest installment loan financing.

The CFPB released a report in 2023 highlighting concerns that BNPL users were more likely to rely on high-interest financing tools such as payday lending, suggesting frequent buy now/pay later users are more financially strained. A Federal Reserve Board of New York study in 2024 found that less financially stable consumers are more likely to utilize such products.

BNPL loans skew to young consumers. BNPL purchases made up 28% of total unsecured consumer debt among borrowers ages 18-24, compared to 17%, on average, among borrowers of all age groups, the CFPB found. BNPL lenders have touted the products as a safer alternative to credit card debt and an ability to serve borrowers with subprime credit. 

The research released by the CFPB is among a slew of last-minute actions before the changeover in administrations.