Installment plans with a “buy now, pay later” spending model have become popular in recent years — and they’ll probably gain more favor as the pandemic economy continues to shake up many households.
Is this a payment method you should try? Only you can decide whether buy now, pay later is a good idea. Here are some answers to common questions about installment plans, often referred to as BNPL plans.
[See: 35 Ways to Save Money.]
How Does Buy Now, Pay Later Work?
There are a lot of installment payment plans out there, and most will allow you to split the payments of a purchase into four equal interest-free installments.
Afterpay is the most well-known of the plans, but there are other big players in this market including Klarna, Quadpay and Affirm.
Here’s how it works: If you buy, say, patio furniture with Afterpay, you’ll pay the first installment right at the point of sale. Then the patio furniture will be sent to you. Two weeks later, you’ll pay the second interest-free installment. Two weeks after that, the third interest-free installment is due. Four weeks later, you’ll pay the fourth and final interest-free installment.
Generally, these BNPL services are only offered for online shopping, but some offer installment plans as an in-store payment.
For instance, Walmart uses Affirm if you want to buy now and pay later, and Target uses Quadpay. In both cases, you can use the BNPL program online or as a payment at the register inside the store.
Some stores use multiple buy now, pay later programs; for instance, Finish Line uses both Afterpay and Klarna. Other stores, like the aforementioned Walmart and Target, exclusively use one service.
These days, the odds are decent that the store you’re shopping at, especially if it’s online, will offer some sort of installment plan — or maybe a variety to choose from.
Is One Installment Plan Service Better Than Another?
It really depends on your opinion. Just make sure you read the fine print and understand how the “buy now, pay later” concept works and which services may have higher fees or spending requirements.
Pros and Cons of Online Installment Plans
There’s a lot to like — and not like — about online installment plans.
In the plus column:
— If you make each installment plan payment on time, in most cases, you will pay no interest.
— You’ll get whatever you order or buy as fast as you would by paying the balance immediately.
— Instead of having to pay for something all at once, you can spread out the financial pain over several (usually four) payments.
In the negative column:
— If you don’t make the installment payment plans on time, you will end up paying more for your product than you would otherwise. You’ll be charged late-payment fees.
— There is often a minimum spending requirement. If you want to buy a pair of socks for $10 on an installment plan, you probably can’t. Generally, you need to be buying something $35 or more (that’s the case, for instance, with Klarna). That said, there isn’t always a minimum spending requirement. If you use QuadPay, and you so desire, you can buy a pair of $10 socks over four equal interest-free payments. (On the other hand, as the Afterpay website points out, it doesn’t have a minimum spending requirement but stores that use Afterpay might.)
— Not everyone is approved for an online installment plan. It can depend on a lot of things, including the cost of the product that you want to buy and whether you have a history with an installment payment plan service. If you’re new to using it, you may not be approved to buy something expensive.
10 Buy Now, Pay Later Installment Plans
— PayPal. This is a fairly recent development in the “buy now, pay later” space. If you’re buying something through PayPal, and it’s between the price of $30 and $600, the website will allow you to choose “Pay in 4” at millions of online stores. So if you’re at the Home Depot website, for instance, and you see that you can pay with PayPal, you click on that, and then you’ll be given a chance to click on a “pay later” button. If you choose “Pay in 4,” you’ll make a payment every two weeks. There’s no interest and this has no impact on your credit score, provided, of course, that you don’t close your bank account and skip town. You’ll probably see your credit score crater soon after that.
— Afterpay. There is a grace period for late payments (usually 10 days; it’ll be on your payment schedule). If the payment isn’t made by then, you’ll be charged a late fee. The fee amount varies depending on how much the purchase was, but the amount of late fees will never be more than 25% of the initial order.
— Klarna. Late fees can be up to $35 per missed month, but your late fee won’t exceed what the minimum payment is due. And note the “up to.” You might pay a much smaller late fee. It depends how expensive the item is.
— QuadPay. Late fees are $5, $7 or $10 depending on your state. You could get more than one late fee if you continue to be late with a payment.
— Affirm. This service doesn’t charge late fees (or any fees) but points out that no payment or an underpayment could hurt your credit. So how does it make money? Well, it does charge interest — but it’ll tell you how much in interest you’ll pay up front.
— Sezzle. You pay about 25% of the total cost when you make your purchase — and like most of these services, you’ll make three more payments every two weeks. If you are late with a payment, you’ll be charged $10, but if you then make the payment within 48 hours, the $10 late fee will be waived.
— ViaBill. You choose it at checkout, create an account and pay in four installments. You pay the first installment at checkout, and the rest later, interest-free. If things go south, and you can’t make the payment around the end of the month, ViaBill will try to try several more times at the beginning of the month to take the payment. If you haven’t paid by the 15th of the month, you’ll get a late fee — either the value of the installment or $15, whichever is less. And then at the end of the month, ViaBill will try to take out two installment payments at once.
— Perpay. This buy now, pay later service is aimed at people with bad credit. You make your purchases through Perpay’s online marketplace, and you can buy merchandise like Apple products, Nintendo and KitchenAid. Your installment payments come directly from your paycheck, and so, yes, you might feel like the application is a little intrusive. On the other hand, you won’t be paying interest or fees.
— Zebit. This is an interesting buy now, pay later service. You can buy up to $2,500 worth of merchandise through Zebit. You’ll make a down payment and can split up the rest of the payments over six months. There’s no interest and no late fees or prepayment penalties. That said, customer reviews have suggested that you’ll pay more for merchandise through the Zebit website, and that shipping prices are high. There is also an 18% handling charge for e-gift cards that should give any consumer pause.
— Amazon. We have one of the biggest names in retail way down on this list because it doesn’t seem to heavily promote its “buy now, pay later” service, and there seems to be no rhyme or reason as to what products can be paid in installments and who is eligible. But many times, you’ll find that products on Amazon.com can be split into five payments. The first installment is due the day the order ships; the other four payments are due every 30 days, and you can pay off the entire order early if you choose.
Are Buy Now, Pay Later Plans a Good Idea?
It’s really a judgment call.
Rakesh Gupta, associate professor in decision sciences and marketing at Adelphi University in Garden City, New York, says, “I don’t believe there is much added value to the consumer from these types of payment schemes. They are somewhere between layaway plans from some retailers and payments-in-full to credit cards.”
He sees the main downside is that it could cause you financial stress later. “It means keeping track of another bill and another account on top of mortgage payments, home equity payments, auto loans, student loans, credit cards and a host of other bills,” Gupta says.
He thinks it’s likely that a lot of people will end up missing payments and then shelling out more money than they needed to for the product.
Robert Goldberg, a clinical associate professor in finance and economics, also at Adelphi University, says the main downside is “these plans encourage spending beyond one’s means.”
He concedes that there might be some situations where a consumer, short on cash, could benefit from these plans, but overall he wouldn’t recommend regularly using installment plans.
“I reviewed these plans with my freshman college students taking a personal finance course, and they agreed that it is better to delay the purchase, save the money and then decide whether the expenditure makes sense,” Goldberg says.
Still, it really comes down to how badly you need the item you’re thinking of buying. If it’s something you feel you do need now, and you’re willing to pay in installments, it can beat a layaway plan — which generally has fees, and you’re often not able to get the item for weeks or months. It certainly beats taking out a payday loan to pay for the item. It is arguably a better way to make a purchase than putting the item on a credit card and carrying revolving debt — provided, of course, that you make the installment payments on time and aren’t late.
Paying later is not going to get you into financial trouble. Paying late will.
On the other hand, don’t forget Gupta’s warning that buy now, pay later installment plans mean that you’ll add another financial obligation to your short-term future. If the purchase is something that can wait, you probably should listen to Goldberg’s students.
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Update 06/01/21: This story was published at an earlier date and has been updated with new information.