Remember layaway? It was a service many retailers offered that allowed customers to buy now and pay later without using credit cards. A customer would select their items, place them on layaway, make a small down payment, and then pay the balance in installments. Once paid-in-full, the customers took home their items. It was an efficient system that gave customers purchasing power without the potential drawbacks of using credit.
Such a system doesn’t work for online shopping. Still, there is something similar that’s quickly gaining popularity: point-of-sale loans, also known as “buy now, pay later” services. Administered by companies such as Afterpay, Klarna, and Affirm (among others), these instant loans allow customers to make a purchase and pay in equal installments, usually every two weeks or once a month. The big difference between layaway and this new 21st Century equivalent is that retailers ship customers’ orders right away, rather than waiting until customers pay in full. Let’s learn more about point-of-sale loans.
How Do Point-of-Sale Loans Work, Exactly?
If a retailer offers these loans, it will be listed on the checkout page as a payment option. If you choose to pay with the service, you’ll have to create an account and add the credit card, debit card, or bank account information you’ll use to make payments. Once you set the up, you’ll complete the payment process and receive your order confirmation.
How Do I Know When Payments are Due?
You will generally receive both an email and text reminder from the loan company about 3-5 days before the payment is due. That allows you time to review your payment method and ensure the amount will go through. You can also change your payment method, or even choose to pay the remaining balance in full.
Do the Loan Companies Charge Interest?
Here’s where things can start to get tricky. Generally, if you make payments on time and pay in full by the agreed-upon date, you won’t pay any interest or fees. However, if the loan company attempts to debit a payment and it doesn’t go through, you’ll be charged a late fee, and interest will begin to accrue. You should thoroughly review the interest and fee structure before agreeing to one of these loans.
How Do Point-of-Sale Loans Affect Credit?
Because this form of buy now, pay later lending is still relatively new, we don’t yet have a clear picture of how they can affect credit long-term. Some of these loan companies report positive payment history to the credit bureaus, while others don’t. However, it’s safe to think most will report adverse payment history or charge-offs to the credit bureaus, which can, in turn, harm your credit.
What’s the Bottom Line?
Point-of-sale loans are like any other form of credit. Used carefully, they can be a useful financial tool. But just like credit cards, if you end up with multiple buy now, pay later loans making several payments all due around the same time, it can quickly spiral out of control. You may find yourself struggling to keep up. It’s still safer and smarter to save up and pay for purchases in cash, rather than using point-of-sale loans to facilitate impulse buying.