Buy-now-pay-later offers are becoming increasingly popular. However, consumers tend to ignore the fact that they are actually taking out loans. This can become a debt trap and significantly worsen your credit rating. The Schufa credit reporting agency has recently started cooperating with individual providers.
It almost sounds too good to be true: order the expensive games console, but only pay a month later. This is the attractive promise of payment service providers, whose logos are now present in many online shops. “Buy Now, Pay Later” (BNPL) is the name of the magic formula that providers like Klarna, Ratepay and Paypal want to use to attract customers.
But of course, consumers with such services cannot postpone payment until the next day without consequences. In some cases, BNPL involves an installment payment, i.e. a loan, so to speak, which the customer then gradually pays off. Interest also accrues. And as with any loan, there are worries: What actually happens if I can’t pay it? Consumer advocates warn of a debt trap and bad consequences for your own creditworthiness, which makes it more difficult to take out loans later. But how sensitive is BNPL really for credit ratings like the Schufa score?
Two different models at Klarna & Co.
On the other hand, there is installment purchasing, in which consumers pay off the purchase price over a certain period of time through monthly payments. Interest accrues. “Ultimately, the providers are granting consumer credit,” says Birgit Vorberg, consultant for credit and debt relief at the NRW Consumer Center. She warns of the danger of taking out more and more of these small loans. “There is a great risk of losing track,” she says.
Young people in particular often have no idea what the consequences will be if they can no longer service the BNPL debts. “We have even observed a trend of young people boasting about exorbitant Klarna debts on social networks,” she says. Many people don’t seem to realize that this will ruin their own credit rating in the long term. And also not that it could later become difficult to buy a car or a house or just rent an apartment.
Credit agencies such as Schufa register these small loans if the BNPL providers cooperate with them. In the past, credit check inquiries could have an impact on your score. The logic behind it: Anyone who has a lot of debt – even through consumer loans – tends to be less creditworthy. But there seems to have been a change in thinking here, as Schufa explains when asked. “We are seeing a lot of growth in BNPL offerings because people value the convenience,” says a spokeswoman. The numbers confirm this. Schufa’s current credit and risk compass shows that over nine million new installment loan contracts were concluded in 2022, an increase of 30 percent compared to the previous year. Small loans under 1,000 euros are growing particularly strongly, with 90 percent more taken out within a year.
Schufa cooperates with BNPL providers
Schufa wants to take changing consumer behavior into account and started a pilot project with several BNPL providers – including industry leader Klarna – in February of this year. Schufa continues to provide data for credit checks, but in return it no longer uses the pilot partners’ inquiries to calculate the score. “The aim is to find a solution on how information from BNPL transactions can be used effectively and in accordance with data protection regulations in order to secure these transactions and at the same time protect customers from over-indebtedness.” A point in time at which the pilot project is to be evaluated Schufa doesn’t mention it.
In theory, customers can take out installment loans without any bias; it does not initially affect the Schufa score. However, this only applies to the providers participating in the pilot project. And Schufa does not disclose what these are in detail. And of course all of this is invalid if they ultimately fail to service the loans. Defaults are of course noted by Schufa. However, there is currently no evidence in our own data that small loans are driving over-indebtedness, according to the credit agency.
Consumer advocate Vorberg still sees dangers and also holds providers accountable. “In principle, their business model is completely fine,” she says: “But the advertising in particular is very much aimed at the alleged convenience and downplays the risks.” A click is quick, but the consequences can stay with you for a long time.
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