How a Sexy Marketing Offer Can Turn You into an Unregulated Lender and Cost Millions
You’ve seen the ads everywhere in 2025: “Buy now, pay later. Nothing due today.” “Four easy payments, zero interest, no credit check.”
It feels like free money for customers and a conversion rocket for merchants. The truth: if you structure it wrong, the CFPB and state regulators will classify your “pay later” plan as actual consumer credit. That triggers the full Truth in Lending Act (TILA), Regulation Z, state lending licenses, usury caps, and a long list of mandatory disclosures.
Offer it without proper licensing and disclosures? You are now running an illegal lending business.
The Core Legal Trigger
Any extension of consumer credit, including deferred or installment payment plans, is treated as a “credit sale” or “closed-end loan” when:
- The customer receives goods or services immediately
- Payment is deferred or split into two or more installments
- Any finance charge exists (even a “late fee” that exceeds your actual cost)
If you offer more than four installments, the CFPB and most courts automatically presume it is credit, no matter what creative name you give it.
Disclosures You Probably Skipped
Regulation Z requires clear disclosures in the famous “Schumer Box” format:
- Total finance charge
- APR (often 100–400 % when calculated on short-term BNPL)
- Payment schedule
- Late payment fees
- Total of payments compared to cash price
Skip them, and civil penalties start at $ 5,000 per violation and can reach $1 million per day for systemic problems. Class actions follow quickly.
Real Companies That Paid the Price (2021–2023)
| Company | What They Did | Outcome | Cost |
|---|---|---|---|
| Afterpay | “Pay in 4” with zero interest, no hard credit check | California ruled it unlicensed lending, forced refunds, and licensing. | ~$1M+ |
| Sezzle | Same “pay in 4” model | $282k consumer refunds + $28k penalty; required to obtain CA license. | ~$310k |
| Smaller e-commerce merchants | Used white-label or in-house BNPL plans without realizing joint liability | Class actions and state enforcement forcing full refunds of late fees treated as illegal interest. | $500k–$8M each case |
The 2024–2025 Crackdown Made It Worse
- May 2024 CFPB interpretive rule: virtually all digital BNPL products are now explicitly credit under TILA.
- Multiple state attorneys general formed a dedicated BNPL enforcement task force.
- Late fees above roughly $8–10 are now routinely treated as finance charges, driving effective APRs into triple digits and violating usury caps in many states.
How to Offer “Pay Later” Safely
- Partner only with fully licensed providers (Affirm, PayPal Pay-in-4, etc.) and get written confirmation they are the sole creditor.
- If you build or white-label your own plan, obtain lending licenses in 20–40+ states and fully comply with TILA/Reg Z.
- Never charge late fees yourself; let the licensed partner handle them.
- Display the complete Schumer Box at checkout.
Bottom Line
“$0 upfront, pay later” is legal and extremely profitable when done right. Treat it as a casual marketing gimmick without mastering the credit laws, and you will end up on the same list as Afterpay and Sezzle: writing big checks to regulators and angry customers.
Sexy on the front end. Brutal on the back end. Choose wisely.
