You are in the process
of making a purchase, and you see an option for "buy now, pay later."
It sounds like a used car dealership and sounds sketchy. So, what is "buy
now, pay later"? It is essentially a method to pay for medium-sized
purchases, but in installments, offered by app-based financing companies.
Credit check? No. Interest? No. For most installment options, all you need is
the ability to make your payments on time. If you have something unexpected
come up but need to make a purchase, these programs may be for you.
What
Are My Options?
There are quite a few
app-based financing companies in the "buy now, pay later" universe,
including the below:
- Affirm is
beneficial to those who will make significant, more expensive purchases.
They run a credit check and charge interest, but they allow payments to
spread from 3-6 months and work closely with Walmart. If you are
purchasing from one of their other online retailers, you can select them
at checkout.
- Afterpay offers four payments on your purchase, as long as
it is with one of their partner stores. When you check out, the option for
Afterpay will be visible. However, you will have to have an Afterpay
account and make your payments every two weeks. There is a $1000 limit to the
purchase but no credit check. Another perk to Afterpay is purchasing
retailer gift cards from them and paying in installments.
- Klarna is
a lesser-known option but building in popularity. Klarna's "ghost
card" lets you delay payments to an online purchase. The biggest
retailer, Macy's, announced that they would accept Klarna on their
website. Like the other options, this divides your payments into four. You
can essentially shop anywhere because it is a ghost "credit
card," but you have to purchase it through the Klarna app. Need
another perk? They have a loyalty program that gives your rewards for
shopping with them.
- QuadPay is
one of the most popular options right now because it lets you split your
total into four payments over five weeks. There are no fees or interest if
you make your payments on time. While it is the most popular online,
stores that accept Visa can also accept QuadPay.
- PayPal recently
added a "Pay in 4" option for retailers that accept PayPal. You
can split your purchase into four payments, but you have to make a down
payment at the time of purchase (payment 1) and then make the remaining
payments every two weeks until you have paid four payments. There are
limitations to this service, such as being available only in certain
states, a purchase limit of $600, and a PayPal account in good standing.
If Pay in 4 does not work for you, PayPay also offers PayPal Credit and
Easy Payments.
- Splitit is a standout in that they allow you to spread your payments over 24 months. As long as your retailer accepts it, you can select that option at checkout. You will need to add a payment method and set up your repayment plan, but Splitit will automatically take the payments after your purchase.
While these are not the
only programs, do your research on these and other options before purchasing.
Advantages
and Disadvantages
As you might expect,
there are benefits and drawbacks to using "buy now, pay later"
programs.
Advantages
Paying in installments or "buy now, pay later" has its benefits:
- When items are trendy and can sell out or have a
special price, paying in installments allows you to get the item without
paying all at once.
- If you want a higher-ticket item but do not want to
devastate your bank account all at once, a payment plan may be for you.
Disadvantages
A big purchase paid in installments? Sounds great, right? Well, there are quite
a few things that you may want to consider before going the "buy now, pay
later" route:
- If you miss a payment, you can face high interest (up
to approximately 30%), which will be charged not on what you owe but on
the initial purchase price. Additionally, if you miss a payment, you will also
be facing late fees that can quickly add up!
- If you have automatic payments with apps like Splitit,
you must make sure that the money is in your account. If your payment
overdraws your bank account, you will incur additional fees from your
bank.
- If you pre-pay your loan off, you may also be subject
to a penalty. It sounds crazy to penalize someone for an early pay off,
but if you pay yearly, you prevent the company from collecting interest.
If you hope to pay it off sooner, check the fine print.
- One of the most severe disadvantages is that some of
these apps still report to credit bureaus even though they did not require
a credit check. That's a great thing if you pay everything on time;
however, a missing payment could lower your credit score.
Takeaway
There are pros and cons to the "buy now, pay later" programs. The best way to use it is to purchase something you need but cannot purchase upfront. Try to avoid buying items simply because you can. By doing that, you can get caught up in the fine print of these programs, such as late fees, credit reporting, and added interest. If this isn't the program for you, take a look at personal loans, low APR credit cards, or going the old-fashioned route and saving your money.
