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Retailers are making it easier than ever to make purchases with “buy now, pay later” credit.
Also known as point-of-sale installment loans, they are a type of short-term financing that allows you to split your purchases into monthly installments. Services they offer, such as Affirm, Klarna, Afterpay, and Quadpay, are growing in popularity as consumers want to spread payments across large purchases without using a credit card.
“Buy now, pay later” in the US was up 215% year over year in the first two months of 2021, according to Adobe analysis. The lenders work with retailers like Macy’s, Walmart, and Peloton to offer their services.
However, before you sign up, be careful. Even though you might be tempted to get a low – or zero percent – interest rate and a simple application process, read the fine print.
“It is important to take the time to understand at least the key details of your application before you apply,” said Matt Schulz, chief industry analyst at LendingTree.
“What you don’t know can end up costing you some money.”
Here’s what to look for before you commit.
Beware of spending too much
Interest and Fees
Buy Now, Pay Later loans have interest rates similar to retail credit cards, which means the APR could be up to 30%. However, some offer an interest-free installment payment.
“If you pay off the remaining amount on time according to the installment plan, then these things can really be very, very cheap and basically interest-free,” said Schulz.
“If you don’t pay for it on time or make some other mistake, things can get a bit tricky.”
You may no longer have an interest-free loan and you could be hit with a late fee.
There are also those looking for “buy now, pay later” options because they do not qualify for a credit card due to poor or no credit. In general, lenders “buy now, pay later” have less stringent credit checks, said Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling.
“If you find yourself in this situation, the ticket can come at a high price,” he said. “This could result in fees or higher interest rates that you should expect.”
Pay attention to the deadlines
Typically, you pay your credit card bill once a month. With a “buy now, pay later” loan, you might have a bill due every two weeks, Schulz said.
The unusual cadence could make it easy to forget to pay, which can lead to late payment fees.
You may not be building up credit
Some “buy now, pay later” lenders do not report your on-time payments to credit bureaus.
“Getting your foot in the door is easy, but walking through the door doesn’t mean you are building a credit score for yourself,” McClary said.
However, they will notify the credit bureaus if you missed a payment.
If you are planning on building credit, make sure you understand how the particular lender is handling it.