Have you ever added gifts to your online shopping cart to not accept the total? While we always recommend that you stick to your budget, if you need to stretch your wallet over the holiday season, it is possible to pay a little up front and then pay the rest over time with the services. “Buy now, pay later”.
Companies like Affirm, AfterPay, and Klarna tout the Buy It Now and Pay Later system by giving you installment micro loans. You get your item immediately without having to pay for it in full immediately. Today, AfterPay has more than 8.4 million customers worldwide, two-thirds of whom are millennials and Gen Z shoppers. Of Affirm’s 8.7 million users, more than half belong to the same demographic group.
But what are these installment plans and how are they different from traditional credit accounts? Here is a breakdown of these alternative financing options and how to use them.
What are installment services?
If you’ve ever bought a car, house, or education, you’ve probably used an installment loan. Installment loans are lump sum loans that you pay back over a number of months or years. For products like cars and homes, they are often funded by well-known banks, like Chase or Wells Fargo.
Mini installment plans from companies like AfterPay and Affirm act as microloans for everyday purchases, like clothing, makeup, electronics, and more.. Affirm, for example, also supports unexpected purchases, such as auto repairs through YourMechanic. But unlike loans for the purchase of a car or a new home, which you typically pay off over several years, products and services funded through these services are usually paid off in a matter of weeks or months.
How do they work?
Each online installment plan has different configurations, but the bottom line is: You purchase your item now, select the plan at checkout with an eligible retailer, create an account, and complete your purchase. With Klarna and AfterPay, you receive your goods immediately and then pay for them in four installments: one upon departure and usually every two weeks or once a month thereafter. Affirm offers payment options that typically range from three to 12 months, although some plans have terms of up to 48 months.
For AfterPay, as long as you make your four payments, you won’t be charged any late fees. Klarna offers different payment options and some charge interest. Affirm charges 0-30% interest depending on your payment plan.
To take advantage of an interest-free installment plan, you need to shop at the retailers that support it. Anthropologie, DSW and Fenty Beauty are for example partners of AfterPay. You can see the payout service logo when you view a product, informing you that the partnership exists, and you can select a payment plan at checkout. From there, you’ll usually pay the first installment, and the next one will come out about two weeks later. Otherwise, the product or service will arrive on time, as it would if you paid in full at checkout.
Although they do not look like traditional loans, they are different from other types of alternative payment methods. For example:
These are not credit cards. A credit card is a revolving line of credit for which you get approved. You use your card to pay for your purchase in full, then at the end of the billing period, you will either settle your bill or make payments until you pay it off in full. Typically, if you don’t pay your balance at the end of the billing period, interest will accrue, which can be as high as 20% or more. CNET always recommends .
These are not the same as the layaway. Layaway is when you agree to pay for an item over the course of a few months and once you’ve paid for it you can take it home. Layaway usually requires an initial deposit and a service charge, and you don’t receive your goods until you’ve paid for them in full. Some installment plan companies require an initial deposit, but you don’t have to wait to get your item; you get it right away.
How does a remittance service affect my credit score?
When you apply for a loan or credit card, this in-depth credit check examines your credit history to see if you are responsible enough for the credit to lend. With BNPL applications, there is no serious credit request. If the app checks your credit, it will be a gentle credit check, which won’t hurt your credit score. The services do not specify the credit score you need to shop with them.
If you are not diligent with the payments, your credit score could be affected. For most micro installment loans, you need to make payments every two weeks or so and in four installments in total. So if you don’t pay your bill on time, it triggers late payment for some businesses. The three major credit bureaus will be notified and you may see your credit score drop. Late payments are one of the main factors in, and a drop that could affect your chances of borrowing money in the future.
Penalties and fees vary by company. Affirm does not charge any fees while AfterPay charges $ 8. Klarna does not charge a late fee, but if you do not make a payment when due, you will not be able to use the site and the app in the future. None of these products charge a prepayment fee. Therefore, if you have the funds to pay off your balance sooner, you will not be penalized.
Should I use these services?
It depends on what kind of customer you are and your mindset about money. First weigh the pros and cons:
- You can get it even if you can’t afford it right away: If you have things you need or want to buy, you don’t have to pay full price at checkout. The installment micro credit allows you to pay for your purchase in a few weeks.
- You don’t need a lot of credit to use it: Most services do a smooth credit check which will not hurt your credit score. If you don’t have good credit or a long credit history, this is a good alternative payment option.
- It’s easier than a loan or a credit card: If you’ve had trouble with credit cards or don’t like using them, this is an easier method than applying for a credit card or personal loan. You can apply at the cashier, whereas if you want a credit card or a loan, you will have to wait a few days before you can use these funds.
- You might think you’re spending less: If you balk at a $ 400 sofa, seeing the payments split into $ 100 every two weeks, for example, makes you think you’re paying less for an item. In reality, you are still paying the same amount and borrowing money to do so.
- You might not be approved for the full amount: Even if you don’t have a strong credit history, this is still a factor in determining whether you qualify for the full amount requested. You may not be approved for the full amount you request.
- Not all purchases are eligible: Even though the retailer is a partner, not all purchases are eligible. For example, AfterPay has a minimum installment payment of $ 35, so if your order is less than that, it is not eligible.
- it’s still a loan: Remember, you always take out a loan, even if you pay it off sooner than you would with a traditional loan. Failure to pay on time could result in interest charges, late payment charges, or the inability to use the service in the future.
While the convenience of deferred payment sounds appealing as a way to get something right now, you are still forced to pay your bill in full. If you need something now but can’t afford it, micro installment loans can be a good idea. But if you think you won’t be able to pay, you can consider another payment method or wait until you have cash on hand to complete your purchase.
Correction, April 30: Affirm has 8.7 million users, more than we previously cited. It also offers repayment options ranging from three to 12 months, a shorter period than stated previously. Clarification that AfterPay does not charge late fees as long as you make four payments.