The N.C. Department of Justice sent letters on Dec. 1 to the six largest “buy now, pay later” lenders, demanding default rates, consumer contracts, how they assess customers’ capacity to repay, and other business details. The letter coincided with Cyber Monday, an annual online shopping event held four days after Thanksgiving .
“Buy-Now-Pay-Later loans may seem simple and safe, but they can lead to surprise fees and growing debt,” North Carolina Attorney General Jeff Jackson wrote in a statement Monday. Jackson’s office noted customers have begun using these loans to purchase daily goods like groceries, event tickets and clothing.
Six other Democratic attorneys general co-signed the letter, with Connecticut’s office joining North Carolina as co-leads in the inquiry. The six lenders were PayPal, Affirm, Klarna, Zip, Afterpay and Sezzle.
Common at online checkouts since the pandemic, buy now, pay later allows customers to split the cost of items over a few months, typically in four interest-free installments, rather than pay the full price up front. Lenders earn revenue by charging retailers transaction fees.
Approximately 15% of U.S. residents used the services last year, according to a U.S. Federal Reserve survey, up from 10% in 2021. Usage was highest (at 19%) among families with incomes between $25,000 and $49,999. The customers were also disproportionately Black, Latino and female, the Federal Reserve found.
Proponents say buy now, pay later gives customers flexibility and clear rules without accruing interest or doing hard checks that ding credit scores. More than half of survey respondents said they used the service for purchases they couldn’t have afforded without it. This year’s Cyber Monday was measured to have had the most single-day buy now, pay later spending ever, accounting for more than $1 billion in purchases — a 4% increase from last year’s event.
“These products are safe, regulated and consumer-friendly, with a business model centered on consumer success, not fees,” Miranda Margowsky, a spokesperson for the Financial Technology Association , wrote in a statement to The News & Observer. The association represents Klarna, Zip and PayPal, as well as Afterpay’s parent company, Block (formerly Square).
In an email to The N&O, PayPal said “the vast majority” of its U.S. buy now, pay later loans are small dollar amounts and allow customers to pay over time with no interest and no late fees. While the service has grown this decade, both online and in-store, Margowsky said the payment option still accounts for a “small fraction” of total sales. States step into federal void
Skeptics caution the comparatively frictionless payment system can mount personal debts and sink credit scores.
In 2024, nearly a quarter of buy now, pay later customers made a late payment, according to the Federal Reserve, a notable jump from 18% the prior year. Late payments can carry fees disproportionate to original sales prices, says Nadine Chabrier, senior policy counsel at the Durham -based Center for Responsible Lending, part of Self-Help Credit Union.
“I don’t consider (it) a threat,” she said. “I consider it something where we have a lack of transparency, and we really need a lot more information.”
Chabrier said some states have tried to regulate this sector in the absence of federal government involvement. “Things like ability to repay, dispute protection, credit reporting, situations where a consumer’s account is repeatedly debited if a payment is declined, customer service — things like that,” she said.
In their joint letter Monday, the seven attorneys general also raised concerns about how buy now, pay later lenders handle payments when products are returned or don’t arrive as advertised.
Under a 2024 rule, the federal Consumer Financial Protection Bureau treated buy now, pay later providers like credit card lenders under the Truth in Lending Act. The law stipulates certain financial disclosures and consumer protections. This spring, under a new presidential administration, the CFPB said it would withdraw this rule and not release a new one. The Financial Technology Association had opposed the Biden-era rule.
Jackson isn’t the first North Carolina attorney general to examine the buy now, pay later industry; in 2022, before he was elected governor, Josh Stein joined a 17-state coalition advocating for the CFPB to set more regulations around these loans.
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