Buy Now Pay Later and Payday Loans: Understanding a Credit Union’s Role in Short-Term Lending

Buy Now Pay Later (BNPL) services and payday loans have gained significant traction in recent years as consumers seek flexible financing options to manage their day-to-day expenses. While these products can provide immediate relief in times of financial need, they also come with risks that can impact long-term financial health.

Financial institutions like credit unions are uniquely positioned to offer responsible short-term lending solutions that can help members navigate financial challenges without falling into debt traps. Let’s explore the pros and cons of BNPL and payday loans, the dangers of predatory lending, and the role credit unions play in providing ethical alternatives.  

The Rise of BNPL and Payday Loans

BNPL and payday loans have become popular thanks to the promise of quick access to funds and the appeal of deferred payments. According to the Financial Health Network, 17% of consumers used BNPL at least once in 2023, and this trend shows no signs of slowing down.

These products are particularly attractive to vulnerable households who struggle with financial literacy and may lack access to more traditional credit options. The Consumer Financial Protection Bureau (CFPB) has found that over 30% of BNPL users had no or negative credit card liquidity, and that 25% of BNPL users had no money set aside in case of emergencies.

The Financial Health Network's FinHealth Spend Survey revealed that these households also use BNPL nearly four times more often than financially healthy households. In fact, these consumers tend to use BNPL for even smaller purchases and at a much more frequent rate than their financially stable peers. The highlights how BNPL is seen as a financial lifeline, but it also underscores the need for careful consideration of its risks.  

The Risks of Predatory Lending

While BNPL and payday loans provide easy access to funds, they come with potential pitfalls that can worsen financial health. Many BNPL services do not have the same regulatory oversight as traditional credit products, leading to confusion and potential misuse.

The Financial Health Network found that BNPL users are disproportionately struggling financially, often resorting to these services in the absence of other options. For many, this can result in the cycle of debt – with accumulating fees and missed payments that negatively impact credit scores.

The CFPB has recognized these risks and recently issued an interpretive rule clarifying that BNPL loans access through digital user accounts meet the same definition of a “credit card” under the Truth in Lending Act (TILA) and Regulation Z. This change aims to increase consumer protections but also raises questions about which provisions apply to BNPL lenders.  

How Credit Unions Can Take a More Positive Approach to Short-Term Loans

Unlike traditional payday lenders, credit unions operate with the mission to serve their members – often prioritizing financial wellness and education. At the CU FinHealth conference earlier this year, experts discussed how credit unions can use payday loans and other short-term lending products to provide critical financial support without exploiting members. Credit unions can offer responsible payday loan alternatives that are designed to help members in emergencies without trapping them in cycles of high-interest debt.  

These ethical short-term loans play an important role in offering a member-first approach and help support members who face financial shocks – like unexpected medical expenses or car repairs. Credit unions often implement protective measures, including caps on fees, lower interest rates, and repayment flexibility, making these loans a much safer option compared to traditional payday lenders.  

Credit unions can also provide access to financial education and resources, empowering members to actually improve their financial habits and reduce dependency on these types of short-term borrowing.  

Bridging the Cap with Financial Wellness Programs

Financial wellness programs – like the Enrich program, offered by iGrad – play a crucial role in helping consumers navigate the complex nature of BNPL and payday loans. The Enrich program provides tailored financial wellness resources that empower individuals to make informed decisions, understand the risks associated with predatory lending, and explore safer alternatives through financial institutions like credit unions.  

These programs are particularly valuable when it comes to guiding members toward more responsible borrowing practices and helping them break free from harmful debt cycles. By combining these robust education tools with access to ethical lending solutions, credit unions can create a more supportive financial ecosystem that prioritizes member well-being.