Should you buy now, pay later? tread carefully

Business

“It doesn’t help you build your credit like a credit card, but it can definitely hurt your credit if you’re not making payments on time.”

Afterpay, Apple and other financial tech companies are popularizing installment plans to pay for purchase expenses. Critics worry that the programs are intended to make people believe the product is cheaper than it actually is and therefore lose control of their spending.

In the summer of 2020, amid pandemic fear and uncertainty, Amber Cole of Colorado Springs, Colorado, turned to retail therapy. She browsed Lululemon’s website for $50 to $130 for trendy athletic apparel like T-shirts and leggings.

Cole, 33, saw an attractive option to pay for his purchases. After entering some information, she could buy clothes in four installments in six weeks. Thus, the $50 T-shirt shrunk down to a $12.50 payment; A $130 pair of leggings was only $32.50. Best of all: She could have gotten the goods before she finished paying, and she wasn’t on the hook to pay interest.

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This friction-free option for paying for items in piecemeal – called “buy now, pay later” – was popularized by Afterpay, a fintech firm based in Australia and founded in 2014. During the pandemic, as people hunkered down at home and sought to fill vacancies with physical assets, installment payment schemes gained traction. Afterpay, which Square acquired in 2020 for $29 billion, has spawned copycats, including Affirm, Klarna and Fingerhut. This month, Apple announced that it would be offering a similar program.

While financing programs offer upsides such as interest-free payments, there are potential dangers. Personal finance experts said the rule of thumb for financial security is to be aware of your budget and be in control of your spending. But the Buy Now, Pay Later programs aim to make people understand that the product is actually cheaper and make them lose control over their spending, critics said.

In December, the Consumer Financial Protection Bureau began investigating these programs, raising concerns that people could accumulate debt with multiple purchases.

“They can be helpful to consumers in that they don’t charge interest if paid on time, but consumers can buy more than they plan,” said Laura Udis, a program manager at the bureau.

Cole fell into that trap. Using installment payment plans, she said, she increased her average purchase from $200 to $400 per order over time. Packages showed up at his door every day. Her biggest regret was the $600 rug from Anthropologie (spread over four $150 payments).

Cole soon fell behind in paying his regular bills. She eventually came clean to her husband and, in order to hold on to payments, got a job at a bakery and sold some of her impulse buys on eBay. A few months back, he closed his Afterpay account.

“I had a beautiful closet full of beautiful clothes, purses, and shoes,” she said. “But it is also full of shame, guilt and regret.”

Buy now, pay later has become impossible to ignore. Here’s what you need to know.

How to buy now, pay later? depends on.

In general, programs from companies like Buy Now, Pay Later, Afterpay, Affirm, Klarna, and Zip look similar, but they have significant differences.

They are typically short-term loans that let you pay for an item in four installments (or less) over a period of about six weeks. After a consumer provides certain information, such as a name and Social Security number, companies usually do a light credit pull. From there, you make a down payment, which is 25% of the total cost of the product, and bill every two weeks for the remaining three payments.

The loans are interest-free to people in large part because the retailer pays a high transaction fee — 4%, nearly double the normal transaction fee charged by a credit card company. The benefit for the retailer is that installment plans can persuade people to buy things they wouldn’t otherwise, said Jared Wiesel, an executive at Revenue Analytics, a pricing and sales consulting firm.

What happens when you miss a payment? This is where the differences emerge. Afterpay charges a flat $8 late fee for approximately 10 days after the missed payment. Affirm doesn’t charge any fees, but it says late payment can damage your credit score, Which can hurt your chances of getting another loan.

This one major downside was recently highlighted by John Cabell, director of banking and payments research at JD Power. published a study About problems with paid programs.

“It doesn’t help you build your credit like a credit card, but it can definitely hurt your credit if you’re not making payments on time,” he said.

According to the Consumer Financial Protection Bureau, returns have been a source of confusion among consumers who have purchased now, paid financing later. For some retailers, consumers must first contact the creditor, who then submits the payment schedule and notifies the retailer of the return. For others, the customer contacts the retailer, who contacts the creditor.

Just to say that it’s early days for shopping, pay later programs, which have many variations and unknowns. As is the case with taking any type of loan, people will benefit from reading the fine print.

So who is this good for?

Buying now and paying later can be beneficial in some situations. Cabela’s came up with one in which an installment plan can be used to make an emergency purchase, such as a replacement of a kitchen appliance, so that the money doesn’t leave a bank account all at once.

Yet according to research by Caballe, most people don’t access these loans. Most buy now, pay later purchases include clothing and home goods, and 21% of young consumers say they are using multiple buy now, pay later accounts.

“Suddenly you have eight payments that are affecting your card, and that can get complicated,” he said.

Above all, the key to reaping the benefits of these interest-free loans is knowing that you can actually afford what you’re buying, said Julie-Alma Tavares, personal finance advisor. That said, as important as it is, you should avoid using installments on the pretext of buying more things than you need.

Alyssa Salinas, 34, a teacher assistant in Chicago, believes she’s got installment planning under control. She said she regularly uses the programs to shop for things like shoes and glasses. Her payments are on time because they hit her bank account when she receives her paychecks every two weeks.

“It sounds more convenient than seeing a large amount of money withdrawn from your bank account all at once,” she said. But she admitted that it was probably a bad thing that she was unaware of how the loan would affect her credit score.

This article is originally from . appeared in new York Times,

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