Back to Basics, Continued—What Does “Buy Now, Pay Later” Mean for Consumer Finance?

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Buy Now, Pay Later (BNPL) is the most recent development in the purchase of consumer goods and services and the deferment of payment. In a sense, it is the reincarnation of a very old concept—the layaway. Of course, the difference is that the consumer takes the product home before paying for it, not after.

The BNPL concept is advertised as being interest-free. To comply with the Federal Truth-in-Lending Act (TILA), if payment is permitted in more than four installments, then even an allegedly interest-free transaction, still requires the federal law disclosures—based on that famous legal principle—“there is no such thing as a free lunch!” But, as long as the transaction does not involve hidden fees, or an inflated cash price, then with proper TILA disclosures, the BNPL transaction should not be a problem.

Here is where the transaction can run off the rails: If the cost of the consumer product in a BNPL transaction is more than the cost of the product in a cash transaction, then that cost differential will be considered to be a Finance Charge under TILA. Such a charge will require disclosure as a Finance Charge.

Many consumer finance companies purchase retail installment contracts in what is called “indirect lending.” And, of course, all credit sellers originate their own installment sales contracts. It is exceedingly important, then, that as we look to new areas in which to grow our business, we do not run afoul of the TILA requirements in BNPL transactions.

Admittedly, determining the “routine” cash price used by the retailer is not always easy, particularly in auto sales. However, with lesser-cost items that are consistently carried in the retailer’s inventory, such determination can usually be made. Let’s make sure that there is not a unique “mark-up” in the cash price of a BNPL product when the finance company is going to purchase the installment sales contract resulting from such transaction.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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