In this special episode of YourMortgageFAQs, host Tom Heath welcomes Jennifer Humphrey, a Credit Analyst at NOVA® Home Loans, to explore the increasingly popular but potentially risky Buy Now, Pay Later (BNPL) financing options. This discussion sheds light on how these financial products, while convenient, can have serious implications for your financial health, especially when considering major life purchases like a home.
Split Now, Pay More Later? Unpacking Buy Now Pay Later Plans
Buy Now, Pay Later plans allow consumers to purchase goods immediately and pay for them in installments over time. While this may seem like an attractive option for many, especially during checkout at major online retailers, the hidden costs and impacts on credit scores can be significant.
Jennifer explains, “We’re seeing a huge amount of Affirm accounts reporting. Some of them are reporting as collections. It’s targeting people with credit scores of 620 or below and we’re seeing a negative impact to these accounts.”
Key Takeaways: What You Need to Know About BNPL
- The Risks Unveiled: Discover how BNPL plans can affect your credit score and overall financial stability. Jennifer notes, “Each purchase you make through a Buy Now, Pay Later account is a separate trade line, whether it’s reporting to the bureaus or just showing up on your bank statements.”
- Real-Life Consequences: Learn from stories of individuals who faced hurdles in securing home loans due to their BNPL usage. “It’s no longer just about credit reports and income and assets. We have to really scour those bank statements to look for these,” Jennifer warns.
- Expert Advice: Gain insights into what lenders look for and how they evaluate potential borrowers amidst the rising popularity of BNPL services.
Behind the Convenience: The True Cost of BNPL
BNPL schemes are designed to break down the total cost of a purchase into smaller, seemingly manageable payments. However, as Jennifer points out, “You might do it once and think, oh I can split this purchase up into four. And it’s easy. They just take it right out of your debit account. But then, you start snowballing.”
Tom adds, “With interest rates rising, this looks like a no-interest option in some cases but those penalties can be quite severe.”
Take Action: Secure Your Financial Future Today
Are you considering a Buy Now, Pay Later plan, or maybe you’re rethinking its impact on your next big purchase like a home? Contact Jennifer Humphrey for more personalized advice on how to navigate these financial waters. Reach out via LinkedIn: https://www.linkedin.com/in/jennifer-humphrey-b96410106/
Or, contact Tom Heath today to learn more about this and other insightful topics that can help you make smarter financial decisions. Check back regularly on MGGroupTucson.com, as we add new episodes of YourMortgageFAQs weekly!
Stay informed and make educated decisions to ensure your financial health remains strong as you work towards your dream of homeownership in Tucson.
Transcript (Unedited)
Tom Heath
We are with Jennifer Humphrey of our Credit Services Division. Is this the appropriate title for you? Are you Queen of Credit Services? What is the actual title?
Jennifer Humphrey
Yes, Queen is appropriate.
Tom Heath
OK. Your Majesty. Welcome. Wanted to share with you just a very quick topic that is becoming much more prevalent. We’re seeing it in the lending world. And one of the benefits of working with a company like Nova is we have people that are focused on these challenges. And as soon as they emerge as potential concerns, we have the ability to identify and really want to talk now about the buy now pay later concepts that you see every time you check out like an Amazon or some of these other places and you on the credit side are starting to see this because some of them are reporting to the to the credit bureaus.
Jennifer Humphrey
Correct, we’re seeing a huge amount of a firm accounts reporting some of them are reporting as collections out with leads and ultimately we’re seeing the impact targeting people with credit scores of 620 or below and we’re seeing a negative impact to these accounts.
Tom Heath
So already having someone that’s has some challenges and a lot of times they’re probably like an FHA borrower and now they’re being saddled with some of these additional debts which on the surface I think if you look at an example of buy now pay later it kind of makes sense for a single transaction under certain circumstances, but what we’re seeing is people are doing this multiple times, and so now it’s not a single transaction, it’s…
Jennifer Humphrey
Yeah, 10, 15, 20 separate accounts, because each purchase that you make through a Buy Now, Pay Later account is a separate trade mine, whether it’s reporting to the bureaus or just showing up on your bank statements, they’re all individual.
Tom Heath
I think the attractive piece of it is that you just break up what you pay into some installments over three, four, five months, and that seems kind of easy to manage. Where is it? Where’s the challenge?
Jennifer Humphrey
It does, but it’s snowball. So you might do it once and think, oh, I can split this purchase up into four. And it’s easy. They just take it right out of your debit account. And then you’ll do it again and again. And then you start snowballing. And ultimately, what happens is then it feels like you’re drowning. Then, you know, one transaction can turn into five, 10, 15. Then you can’t catch up. Then all those small payments are adding up and impacting you. And yeah, it’s drowning.
Tom Heath
And you don’t pay interest on the account, correct? If you do, if you pay everything on time, you don’t pay interest, but there’s a huge penalty? Or is that?
Jennifer Humphrey
So, um, every account is different. There’s several of them out there, but ultimately, let’s say you miss a payment, uh, and you’re late, then that interest is around 30 % and not of what you owe now, but it goes all the way back to the original purchase amount. So let’s say you bought something for $500, you’re on your last payment and you’re late. Then there’s that penalty of the interest going all the way back to that $500 purchase and 30 % is huge.
Tom Heath
That is a huge amount and and you know, he said those these are always automatically deducted from your account, correct? So if you have multiple coming out and you know tracking it Yeah, that’s when this starts snowballing and you end up with the the NSF fees now. I’ve seen correct Yeah, and now these do these all report to credit bureaus?
Jennifer Humphrey
No, right now as it is only a firm reports; the other ones like AfterPay, Zip; They’re not reporting to the bureaus yet.
Tom Heath
I’m learning a whole bunch of terms right now.
Jennifer Humphrey
And there’s many more. And I imagine over the next year, we’re going to see even more names pop up. But those are not reporting to the credit bureaus yet, but they are showing up on bank statements.
Tom Heath
Yeah. That’s where I just talked to a colleague of mine that was doing an FHA loan, and the underwriter noticed that they had almost $500 a month in pay as a pay now. Buy now. Buy now, pay later. Yeah. If you pay now, that’s good. Yeah. Pay now, buy later, that’s a much better concept. But this almost caused this person’s opportunity of home ownership because they had so much on there that it affected their debt -to -income ratio. Luckily, Nova was able to get it done, but that’s kind of a scary proposition. It’s no longer just about credit reports and income and assets. We have to really scour those bank statements to look for these.
Jennifer Humphrey
Yeah, six months ago, this wasn’t even as big of a deal, but now underwriters are definitely taking notice of it. They’re scouring through bank statements to see because obviously this is debt and so we do need to take all that into consideration when they’re purchasing a house.
Tom Heath
And with interest rates rising this looks like a no interest kind of option in some cases but those penalties can be can be quite severe. Jennifer, thank you, thank you for your time. Appreciate you putting this on our radar and making us aware of it. I’d heard rumblings of this but not nearly to the degree of what you made us aware of today. Thank you. Thank you, have a good day.
