Study shows that loans that buy now and pay later expand the overall credit market
A relatively new type of small loan created by fintechs and offered by retailers is expanding the credit market, especially among young consumers, according to a study published Thursday.
TransUnion, the Chicago-based credit bureau, analyzed the credit history of millions of people applying for instant purchase loans – or point of sale (PoS) loans – and compared them to other loan seekers who did not PoS -Apply for loans.
Some have feared that these short term loans could put consumers into debt more than they can handle. Or, from the point of view of some lenders, that consumers would draw more credit on these store plans and reduce their balances on their credit cards or other consumer debt.
Liz Pagel, SVP for consumer credit at TransUnion, said the TransUnion survey refutes these concerns.
“They don’t seem to cannibalize any other type of credit,” she said. “It’s an extension of the entire credit market.”
A survey of PoS applicants found that the most common reason for looking for a buy-it-later loan was to purchase an item that was within their budget. While they tend to own more credit cards and other types of consumer credit, their default rates are on par with other borrowers in terms of age and risk group.
Pagel said credit unions may want to consider those consumers who are borrowing or applying for buy-it-later-credit.
“They are customers of credit unions; they are customers of banks, ”she said. “These consumers could be in the credit market.”
Buy-now-pay-later loans have been around as long as electronics stores have been selling refrigerators. And the category technically includes indirect car loans with dealers and finance for solar panels or other home improvement sold by contractors.
Pagel excluded larger loans like financing solar panels sold by contractors from their study to focus on equipment-scale loans and the new type offered by retailers through fintechs for small, routine purchases – usually below $ 500.
The fintechs typically charge retailers 2 to 7% of the price and sell their loans to secondary markets that may buy unsecured personal loans.
The small loans are often paid out every two weeks for eight to twelve weeks with the first payment made when the purchase is made. Buyers do not pay interest on the small loans, while the interest costs are shared across larger, more traditional buy-it-later loans, which typically have a term of one to two years.
In some cases, the fintechs operate the loans more like the PoS systems used by car dealerships, with banks and credit unions on a list of potential car buyers lenders.
These loans started online, but now many retailers allow their customers to use them for in-store purchases.
Pagel said many lenders’ concern has been that these loans from fintechs like Afterpay Limited, Affirm and Klarna are eating up purchases on their credit cards and unsecured personal loans. They wanted to know if this new lending was a threat to defend against or an opportunity to get started.
“It started as a fintech movement and now more traditional lenders are interested in playing this game,” said Pagel.
Big players from Amazon to Square Inc. have decided to join.
Square Inc., founded in San Francisco in 2009, announced on Aug. 1 that it plans to buy Afterpay Limited of Australia in a $ 29 billion deal that is expected to close in the first quarter of 2022.
Afterpay was founded in 2014 and claims to serve more than 16 million consumers and almost 100,000 retailers worldwide, including large retailers of fashion, housewares, beauty and sporting goods.
The homepage of her website shows a young woman looking at her cell phone and bears the words: “Shop now. Pay over 6 weeks. Never pay interest. “
TransUnion decided that these new buy-now-pay-later fintechs are worth a closer look.
TransUnion analyzed the borrowing habits of 4.5 million consumers who made a point of sale inquiry and tracked them over six months. The tracked inquiries started on October 1, 2019 and ended on December 31, 2020. The last six months of action were in June 2021.
Each action taken by PoS applicants was compared to a general borrower population within the same risk segment and age group. The study group consisted of consumers with a hard or soft PoS request from October 1, 2019 to March 31, 2021. Their results were compared with other active borrowers at the same risk level. The results presented in the study relate to consumers who have a credit rating of 601 to 660 in the VantageScore range of 300 to 850. Other risk levels showed similar patterns, according to Pagel.
- 54% of applicants for PoS funding reduced their bank card balances in the six months following their application, compared to 60% of individuals in the total credit population.
- PoS applicants apply for a loan at a higher rate than others in their risk level.
- PoS applicants had a significantly higher proportion of bank cards, loyalty cards, installment loans and car loans. They had slightly lower mortgages.
- While 50% of active near-prime borrowers are 50 or younger, 78% of PoS applicants were under 50.
- Six months after a PoS application, 3.2% of applicants were 60 days or more behind with their bank credit cards, compared to 2.7% of the general credit population. However, the unsecured personal loan default rate among PoS applicants was 3.7%, compared to 4.8% for the general population.