Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Aug 3, 2021

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The CFPB is investigating eBay’s Bill Me Later service for allegedly violating short-term loan regulations by effectively offering financing that is little more than payday loan limits. What does this mean, and what do borrowers need to know about Bill Me Later?

The Bill Me Later program is technically under the PayPal umbrella, and it works by having Utah-based Comenity Capital Bank make instant loans that are then purchased by eBay. Loans under the program carry a 19.99 percent interest rate that customers can avoid by paying off their loan before the end of a six-month period. The Bill Me Later program can also be used at Wal-Mart, Disney, and Apple stores, highlighting the national reach of this lending program. It’s most commonly applied to purchases on eBay.

Comenity Capital is allowed to offer loans through eBay under federal law and does not need to be licensed in each of the states it lends in. Regulators take issue with this since the bank can offer financing under Utah lending rules not following the financial rules and regulations of the home state of individual customers for the loan term.

Similarly, payday loans were once largely unregulated online, allowing lenders to offer money across state lines, in spite of local laws surrounding interest rates and terms. Regulation eventually caught up to the online payday loan industry, yet it still remains under much contention. However, the rules of payday loan companies differ from those for actual banks, such as Comenity Capital. This may seem like a loophole eBay has exploited to issue these lines of credit.

Why Does It Matter If Loans Are Being Issued under Utah Laws?

James Zahradka, Supervising Attorney of the Public Interest Law Firm and Fair Housing Law Project programs of the Law Foundation of Silicon Valley, said that because of a 1980 Supreme Court case, state-chartered banks must comply only with the usury laws of the state where they are chartered.

“It seems that eBay chose a bank in Utah to process Bill Me Later transactions because of Utah’s lax usury laws, which do not restrict interest rates on consumer loans,” he said. “This practice is known as ‘rent-a-charter’, where a bank is issuing loans in name only on behalf of another business which is seeking to avoid other states’ consumer protection laws.”

While a for-profit company like eBay clearly would provide any service to increase cash flow, this development may be a sign that the upcoming holiday season will be rife with lending opportunities. Even though short-term loans are likely to be common during times of heavy purchasing, that does not mean that some borrower’s won’t regret their decision in the future. The CFPB and other federal organizations have issued some consumer protection standards across the country. But some consumers may not enjoy the financial protections they assume they have based on their home state.

“Studies have shown that consumers utilize payday loans and other high-interest products to support their holiday purchases. A study in the UK found that 2 percent of consumers were planning to do so, which in the US would equate to about 2.3 million households,” said Zahradka. “Other studies have shown that Christmas is second only to back-to-school time as the peak time of year for payday loans.”

While most payday loan borrowers repay their debt, some fall into cycles of debt. This potential for heavy indebtedness is a cause for concern. It may increase annual revenue for many businesses including online businesses, but it has much greater repercussions if it creates ongoing cycles of debt or cannot be repaid.

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Are Regulators More Concerned about Payday Loans?

Payday Campaign Organizer at the California Reinvestment Coalition, Liana Molina, said that there is growing concern over companies that are offering payday loans in one form or another. Regulators and citizens alike worry about the long-term repercussions of these lines of credit. Unfortunately, they have a disproportionate effect on those who are already financially vulnerable.

“If a customer uses one of these loans but doesn’t pay it in full during the six-month period, then they are charged interest from the date they made the purchase,” she said. “It would be better if the true cost of these loans (including six months of interest) was clearly represented to consumers when they are considering financing their holiday gifts.”

Bill Me Later is presented like a credit card with the added benefit of no interest for 6 months. While it may seem straightforward, it can come as a nasty surprise to consumers when the 6 months hits. Something as simple as estimating or encouraging payments that would put them at 0 at the 6 month mark would go a long way.

As the weak economy continues to putter along, it is more likely that stores, both online and offline, will end up offering payday loan-like financing to customers eager to gain more purchasing power.

“On a positive note, many of these financial products are facing increased scrutiny from state Attorneys General, and federal regulators, including the CFPB, FDIC, and the Office of the Comptroller of the Currency,” said Molina. “The high interest rates and short repayment terms put too many customers into a debt trap that’s almost impossible to escape.”

Does Bill Me Later Make Sense for Consumers?

Like personal loans, credit cards, etc., Bill Me Later will check your credit score. It will look for things like unpaid bills, bankruptcy, etc. The process may be a little different if the applicants are business owners applying on behalf of their business.

Used a certain way, this program can provide an interest free way to finance things you want to buy without taking out personal or business loans. The important thing is to assess your disposable income and see if you will be able to take advantage of the full benefits before you start the application process.