Shopportunist: A buy now, pay later primer
With funds stretched, a stimulus deal all but dead and the holidays on the horizon, consumers still hoping to pile presents under the Christmas tree without wearing down a credit card have another option: buy now, pay later.
Offered by an increasing number of retailers, buy now, pay later programs are a bit like traditional layaway plans: You fill your cart and place a down payment. However, unlike layaway, you get the products you’re purchasing right away.
The most popular buy now, pay later programs allow payment purchases to be split into four equal, interest-free installments. If a merchant partners with such a program, it will be offered at checkout. Sign-up can be done on the spot. Or you can sign up directly through the lender. You’ll generally provide just your name, email and mobile phone number. A soft credit check is performed — which doesn’t nick one’s credit score — and approval is almost instantaneous.
Macy’s and GameStop just announced plans to partner with Klarna, a Sweden-based direct-payment, pay-after-delivery service firm. PayPal, the granddaddy of all payment systems, recently launched Pay in 4, a program they say can drive retail sales while giving consumers a flexible payment option.
“With Pay in 4, we’re building on our history as the originator in the buy now, pay later space, coupled with PayPal’s trust and ubiquity, to enable a responsible and flexible way for consumers to shop while providing merchants with a tool that helps drive sales, loyalty and customer choice,” says Doug Bland, SVP, Global Credit at PayPal, in a statement about the launch.
Buy now, pay later services have been growing in popularity, replacing credit cards, especially among younger shoppers.
In a report by Payments.com, 87 percent of buyers ages 22 to 44 are interested in having the flexibility to break large purchases into monthly installments, especially if they have poor credit or lack the credit history sometimes necessary to be approved for a credit card.
These programs, however, aren’t without risks. Some finance experts argue that while flexible, buy now, pay later models discourage proper budgeting and encourage increased spending and a burgeoning debt burden. If payments are made late, fees will likely be assessed. Missed payments can negatively impact your credit.
“Anytime you owe money to anyone, for any reason, it’s debt,” says finance expert Rachel Cruze, author of “Know Yourself, Know Your Money” and daughter of budgeting guru Dave Ramsey. “You know that thing you want? You can still break its cost into four parts: It’s called saving up.”
Here’s a breakdown of a few of the most prominent programs to help you decide if this payment approach is right for you.
The gist: Shop with QuadPay via merchant partners or anywhere Visa is accepted both online and in-store. Purchases are split into four equal, interest-free installments. You’ll pay 25 percent at checkout and 25 percent every two weeks.
How to shop: Look out for the QuadPay logo on the product page of verified merchants and check out directly via QuadPay, or download the QuadPay app and use the QuadPay Visa “ghost credit card” number displayed in your app to shop in-store. If you have not paid your total minimum payment in full by the applicable due date, then you may be charged a late fee of up to $7.
The gist: Payments can be made in four, interest-free installments when a purchase is made directly through the Klarna app. Klarna also provides larger loans to buy products online at a maximum annual percentage rate of 19.99 percent. Repayment terms range from six to 36 months.
How to shop: With Klarna you can pay in four installments, charged to your credit or bank card every two weeks, or pay for your order in full up to 30 days later. Shoppers can also create a one-time “ghost” card, a virtual single-use card to use for shopping at nearly any U.S. online store. There is a $1,000 spending limit.
The gist: First introduced in Australia in 2015, AfterPay splits the cost of purchase made at partner stores, including Forever 21, Gap, American Eagle and DSW, into four interest-free payments.
How to shop: Browse your favorite stores and choose AfterPay as a payment method when available. You’ll need to make a purchase of $35 or more to qualify. New users typically have a spending cap of about $500. The total spending limit for any shopper is $2,000.
The gist: Like the other programs, you’ll have an option to pay 25 percent of an item’s price upfront, then pay the rest over six weeks through three equal, interest-free payments. The option is in addition to the company’s longer-term programs, like Easy Payments and PayPal Credit.
How to shop: Shoppers can use the service on purchases priced between $30 and $600. PayPal has the advantage of being offered at a slew of online merchants and physical stores, including 80 out of 100 top U.S. retailers.
The gist: Straight from the company’s website, Splitit is a payment method solution enabling customers to pay for purchases with an existing credit card by splitting the cost into interest and fee free monthly payments — up to 24 months — without additional registrations or applications.
How to shop: At the time of purchase, once the business confirms the shipment, you’ll be charged only the first payment. The remaining balance will be held on the credit card until the final payment is made. After each monthly payment, the amount held from the available balance will be reduced to the new remaining balance.
Once you sign up for installment plan financing, keep these best practices in mind to get the most out of the payment solution.
- Don’t take on too many plans at once. Smaller payments can mask how much you are actually spending, and you don’t want to be stuck with more than you can pay back.
- Know your terms and conditions. Before you accept an offer, be sure you understand any penalties (such as account closure or late fees) that come from not meeting the set terms.
- Always make payments on time, as late fees can be steep. Plus, some services report to credit bureaus.
- Calculate your interest and fees to make sure you are actually saving money over another payment method. You actually might save by using a credit card – especially one with an intro APR.
- Make your installment payments with a credit card if the service allows it, so you can still earn rewards. Plus, you’ll add a bit more flexibility to your payments this way.
- Keep your own payment calendar, even if you have automatic payments or notifications set up. You don’t want to miss a payment if something goes wrong.