Rent now, pay later? The housing affordability crisis goes fintech

As rental costs spiral higher, a growing number of companies are offering services that allow the monthly charge to be split up, which can make it easier for some tenants to pay.

The companies say they’re stepping into the breach where public policies for tenants don’t exist, but consumer advocates say the products are expensive at best and predatory at worst. And with no relief in sight for a years-long housing affordability crisis, the tension looks set to continue.

Roughly one-third of all American households rent, and half of them spend more than one-third of their income on rent, according to the Harvard Joint Center for Housing Studies. For many tenants, paying the rent all at once at the beginning of the month leaves them with no way to get by until the next paycheck arrives.

“It fundamentally comes down to a cash flow problem,” said Samir Goel, a co-founder of Esusu, one of the companies offering the service. “It's not that (tenants) don't make money, it's that the income they get and their expenses are basically in and out.”

In interviews, Esusu’s co-founder, Wemimo Abbey, often references his mother, an immigrant who works multiple jobs including occasional gig work, as an example of the company’s target customer.

“This is not a discretionary spend product the way that a Gucci bag is,” Goel said. “It's really oriented to the fact that one out of every two Americans has less than 400 bucks in their bank account and this solves that problem.”

How does buy now pay later work to pay rent?

Esusu offers what it calls “split pay” as part of a broader package of services such as financial coaching that is available with a subscription. In some select cases, tenants can also opt to use a loan from Affirm, the fintech better known for its “buy now, pay later” offerings.

Such services allow a tenant to apply for a loan for a portion of the coming month's rent then repay it later. Each request must be underwritten separately, even if the tenant has been approved in the past. Borrowers may not apply for a new loan until they’ve paid back the first one, which keeps the debt from growing in perpetuity.

Esusu declined to share details about how tenants are underwritten, or hard data about how the loans have performed. In a February interview, when the products were still relatively new, Abbey said that most tenants who’ve used the loans are prime borrowers, meaning they have high credit scores and are considered low-risk. “We’ve not seen one default," he said.

Is Buy Now/Pay Later a good idea?

“These products speak to very real problems for people, and people are looking for whatever way they can to stay afloat,” said Ariel Nelson, a senior attorney at the National Consumer Law Center.

But Nelson and other advocates say companies like these aren’t offering a real solution, but are taking advantage of tenants’ desperation.

In February, a group called Protect Borrowers published a report on the industry called “Rent Now, Pain Later.” It used a company called Flex as an example of how rent splitting works.

“Users pay a membership fee of $14.99 per month and a 1% bill payment fee each time they make a payment,” the report explained. If the user repays Flex with a credit card, an additional 3.5% fee is also assessed.

As an example, “A user with a $1,500 rent payment due on October 1st makes a $909 initial payment ($900 towards rent, plus $9 in bill payment fees) and then borrows $600 to cover the rest of their rent. In the background, Flex pays the landlord the full $1,500 directly. The $600 payment is due, with $6 in bill payment fees, on October 15th.”

All in all, the tenant would wind up paying nearly $30 to borrow $600 for 14 days, a cost that Protect Borrowers calls nearly on par with payday loans.

But a Flex spokesman calls that reasonable.

“I understand (for) consumer advocates, in a perfect world, income would be sufficient,'' said Ryan Metcalf. "It would align perfectly with expenses. There would be no late fees. There would be no ability to evict people and housing would be affordable. That's a really great aspirational world.”

In reality, Metcalf said, renters often wind up paying late fees or accessing other, even higher-cost, credit products that “compound their situation,” as he puts it.

Flex, meanwhile, has what Metcalf calls “guardrails” to protect tenants, including no late fees, no compounding interest, one flat fee for use, and no loan “stacking” – meaning that a borrower must pay back a loan before getting another.

'Guardrails' aren't requirements

One of the problems with “guardrails,” however, is that they are good-faith decisions, not firm requirements.

“A fintech might have consumer-friendly policies, but the best recourse for consumers encountering a problem would have been the Consumer Financial Protection Bureau, which has been gutted by the current administration,” said Adam Rust, director of financial services at the national nonprofit Consumer Federation of America.

As USA TODAY has reported, the Trump White House has drastically cut the Bureau, which was set up in the aftermath of the 2008 financial crisis.

While Esusu and Flex both say they are heavily regulated, the regulations they face prioritize the financial stability of them and their partners, Rust explained – not the customer experience.

The noted lack of consumer support is exacerbated by the fact that many of the rent-now-pay-later companies have struggled to deliver their services. The Protect Borrowers report – and many social media platforms – are rife with complaints from tenants who hit glitches and couldn’t get them fixed.

“Several consumers have complained that Flex paid their rent late, did not pay at all even after taking money from their accounts, and did not respond to desperate requests for issues to be fixed,” the report says.

“In certain instances, Flex’s mistakes caused damage to consumers’ credit scores. In others, Flex’s errors have led to evictions,” it added.

In response to a USA TODAY question about this issue, Metcalf said, “If something were to go wrong today, we have a make-whole policy. If Flex is ever at fault, we have covered any cost that a renter may incur, whether that's late fees, we've gone as far as paying their rents that month. And so… while those things happen, they happen very rarely at this point.”

What else to do if you can't afford the rent?

For advocates who work on behalf of consumer housing issues, the rise of fintech solutions like rent splitting is a symptom of how the system is failing many Americans. Tenants who struggle don’t have many good options, Nelson said.

A tenant can always ask a landlord if it’s possible to move the payment date or to pay in installments, she suggested. There’s no specific reason landlords need to collect rent all at once or at the beginning of the month – though there’s also not necessarily any reason for a landlord to agree to such a request, particularly in very competitive rental markets.

For anyone who simply can’t afford the rent, rental assistance programs, both from the government and private sector, may be available locally, Nelson suggested.

Rust said he wonders whether pay-later services will mostly be used as one-time stopgap measures, or whether tenants will just use them "month after month," always behind, always financing the rent.

As Nelson put it, “This is just one more version of: ‘It’s expensive to be poor.'”