NEW YORK (NEWSnet/AP) — Consumers are expected to use “buy now, pay later” payment plans heavily this holiday season, a forecast that bodes well for retailers, but has credit experts concerned.

The short-term loans often come with consumer-friendly interest rates and allow shoppers to make an initial payment at checkout, then pay the rest in installments, typically over a few weeks or months. That may appeal to a shopper buying multiple gifts, especially if they’re balancing other debt, such as student loans or credit cards.

Data shows younger consumers and those with difficulty accessing credit use the loans most frequently. Used responsibly, the installment plans increase financial inclusion, according to Federal Reserve Bank of New York. But some analysts say features of the plans make borrowing too easy and saddle consumers with excess debt.

Short-term installment loans drove $6.4 billion of online spending in October, up 6% year over year, according to a recent Adobe Analytics analysis of online shopping. Adobe estimates one in five Americans plan to use buy now/pay later plans to purchase holiday gifts.

The loans follow a typical model. The lender runs a soft credit check on applicants, then asks for a down payment at the time of purchase, along with an agreement to make four to six payments at two-week intervals, although terms vary. Zero-interest loans are common initial offerings.

If a customer pays late or misses payments, they can be prohibited from using the app, or face interest or fees. Sometimes, these are flat amounts, and sometimes they're calculated as a percentage of the loan.

Pay-in-installment companies collect fees from merchants who are grateful for the increased business. Retailers have found that customers offered the option are more likely to have larger cart size or to convert from browsing to proceeding to check-out. Fed research shows customers spend 20% more when the plan is available.

Most of these short-term loans are not reported to the three main credit bureaus.  Consumers appreciate that, because the loans don't affect their credit scores. But this is a feature that worries experts, because it can lead to “loan-stacking” — when consumers accumulate debt with multiple lenders.

Kevin King, vice president of credit risk at LexisNexis Risk Solutions, said that because pay-in-installment loans often go unreported to credit bureaus, and companies don’t report to one another, lenders face an underwriting challenge. 

LexisNexis Risk Solutions provides buy now, pay later lenders with alternative credit scores for assessing consumers seeking loans, including those who may not have a traditional credit score.

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