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What consumer protections do you have with 'Buy Now, Pay Later' services? Here's what you need to know

Select looks at some of the different consumer protections provided by credit cards, debit cards and BNPL loans.

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Have you ever purchased a winter coat online, only to discover that it looks nothing like the images you saw on the website when it arrives? While you'll have to file a complaint with the merchant and possibly the credit card company before being refunded, returning an item and being refunded is usually straightforward when you buy it on a credit card. 

But what happens when you purchase the sweater using a 'buy now, pay later' loan (BNPL)? 

Will you have to keep making installment payments on the item even after you return it? What company do you contact in order to resolve the issue: the BNPL provider, the merchant, or the credit or debit card issuer that you used to finance the BNPL loan?

BNPL, also known as point-of-sale loans, are installment loans that allow consumers to split up the cost of their purchase over time. BNPL options are available nearly everywhere that you shop, with a number of big-name retailers like Walmart, Amazon, Target and Sephora using them. A recent Credit Karma study found that 44% of respondents had used a BNPL product at least once.

Yet as consumers flock towards this new financing method, they should be cautious about them. 

"BNPL loans are still new, and government regulations haven't fully caught up. That means that the short-term financing options generally offer consumers fewer protections," says Leslie Tayne, founder and managing director at Tayne Law Group. 

In fact, the Consumer Financial Protection Bureau recently warned consumers about the tendency to overspend when using BNPL services, the negative impact they could have on credit scores, their late fees and the lack of consumer protections. 

Below, Select looks at the consumer protections offered by credit cards, debit cards and some major BNPL providers to help you decide which is better for you. 

Consumer protections of credit cards, debit cards and BNPL loans

Consumers are offered a number of credit card protections through the Fair Credit Billing Act. There are two types of complaints consumers can file with their credit card issuer: A billing error or an issue with the quality of a good or a service. A billing error may be an authorized charge, an incorrect charge or a math error. If you have a 'billing error', the FCBA requires that credit card issuers conduct an investigation if a consumer files a complaint within 60 days of receiving their account statement.

While the FCBA does not apply to issues with the quality of a good, consumers can still file a complaint with their issuer. Since this type of complaint falls under state laws, consumers are more likely to resolve their issue or be refunded if they meet certain requirements such as having purchased the item in their home state.

The FCBA only applies to 'open end' credit accounts, such as credit cards or retail cards with revolving accounts, so these rules do not apply to debit cards or installment loans, like BNPL loans.

It's also worth noting that certain cards, like The Platinum Card® from American Express, have benefits that include return and *purchase protection, which can help you get reimbursed after a retailer's return policy has expired, or if your purchase has been lost, stolen or damaged. Terms apply.

However, people who use debit cards also have protections when it comes to fraud charges through the Electronic Fund Transfer Act. Much like credit cards, these protections do not apply to issues with the quality of the product. If consumers do have problems with the quality of a good or service they bought with a debit card, they'll have to resolve the issue with the merchant before contacting their debit card issuer, some of which have their own zero liability policies.

BNPL loans, on the other hand, are not subject to the regulations that credit or debit card issuers fall under. While countries like Great Britain are rolling out regulations on the BNPL industry that would allow consumers to escalate complaints to a national agency, there are no special regulations for BNPL providers in the U.S. Some of the major BNPL providers, such as Affirm, Klarna and Afterpay have their own dispute resolution policies in place.

"If you buy a faulty item with a BNPL loan, you're subject to the policies of both the merchant and the BNPL lender, which can make it tricky to navigate the return process," says Tayne. "In some cases, you may have to continue paying an item until the merchant informs the lender that you've successfully returned it."

For example, Affirm has a dispute resolution procedure that works similarly to a credit card dispute resolution procedure: Consumers have 60 days to open a dispute with Affirm. After both the consumer and merchant submit information to substantiate their claims, Affirm will then rule in favor of either the merchant or the consumer. 

Consumers should also check if they're required to make payments on returned items. Klarna, Affirm and Afterpay all offer consumers the ability to delay payments. Klarna will allow you to pause payments if you report a problem with your order while Affirm will not require continued payments on a purchase if you open a dispute with them within 60 days of the transaction. Afterpay allows customers to push the original payment due date back by two weeks while the return is processed.

Furthermore, depending on how you're financing your purchase through BNPL, you might have to contact the merchant, the BNPL provider and the debit or credit card issuer to resolve issues. (Though some providers, like Affirm, just allow you to link your checking account for payments.)

Since Afterpay only allows consumers to pay with credit or debit card, consumers are subject to the same protections they would be had they used their payment cards directly at the retailer, says Amanda Pires, Vice President of Communications at Afterpay.

This means that if you buy an item using Afterpay and are making payments with a debit card then you're subject to the protections offered by your debit card issuer. According to Pires, 90% of Afterpay transactions are financed with debit cards. 

For consumers, figuring out which companies they need to contact when returning an item or reporting a faulty item that they purchased with a BNPL loan can be confusing.  

Tayne suggests that consumers contact the retailer to understand the return policy, research the BNPL's return policy and as a last resort, reach out to the card issuer if they need additional help. 

"If a retailer won't accept the return or the BNPL service is not cooperating, consider contacting the credit card company. Credit card companies will often ask if you have attempted to resolve matters with the seller, so do your best and dispute a transaction as a last option," says Tayne.

Bottom line

Understanding your consumer protection rights as a credit card, debit card or BNPL user can be complicated and confusing. Before initiating a return on an item that you think is faulty, you should read up on the return policies of the merchant, the credit or debit card issuer or/and the BNPL provider. Most issuers and BNPL providers have a dispute resolution procedures but your first action should be trying to resolve the issue with the merchant.

If you don't want to go to the hassle of potentially having to contact three different companies to initiate a return on a faulty item, you should consider getting a credit card with an introductory 0% APR period on new purchases. Similar to some BNPL products, these cards offer a way to finance purchases without interest, plus you'll get the consumer protections of a credit card and possibly even earn rewards.

*Eligibility and Benefit level varies by Card. Terms, Conditions and Limitations Apply. Please visit benefitsguide for more details.  Underwritten by AMEX Assurance Company.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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