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When to buy now, when to pay later, and when to simply pay now

By on September 18, 2021 0

Digital services buy now, pay later are growing in popularity. While providing consumers with appetizing convenience, these services also leave some with regrets.

Companies like Affirm and Klarna Bank AB allow shoppers to purchase products online, have them delivered as usual, and then pay for their order in installments. Sometimes these services come with interest and sometimes they have no interest. This app-based version of layaway – making small payments for an item over time – has exploded in terms of usage among consumers and retailers. After payment Ltd.

, one of the most popular platforms, said sales among its U.S. merchant partners will increase by $ 8.2 billion this year thanks to the payment plans.

Research firm Kaleido Intelligence estimates that by 2025, online consumers around the world will have nearly doubled the amount of money they spend using buy now, pay for services later to $ 680 billion.

As the use of these apps increases, so do the complaints. UK regulators have limited how buy-it-now and pay-on-pay businesses can advertise their services. Last year, a California supervisory board demanded that several of these companies reimburse consumers hundreds of thousands of dollars.

A recent national survey of nearly 3,500 adults found that one in five Americans made a purchase using a Buy Now, Pay Later service in the past year. The survey, conducted by research firm Momentive, also found that one in six Americans who used such services regretted doing so, citing high interest rates, minimal options for building credit or just buying things they couldn’t really afford.

“What immediately jumped out at me was that the appeal of buying now, paying later is the same as the potential problems,” said Jon Cohen, director of research at Momentive, formerly SurveyMonkey..

“What immediately jumped out at me was that the appeal of buying now, paying later is the same as the potential problems.”

– Jon Cohen, Research Director at Momentive

Buy Now, Pay Later services say they are a better alternative to traditional banking and lending institutions, providing access and flexibility to consumers without credit. A representative for Affirm said it takes out loans for individual purchases rather than extending a single line of credit, a process that relies in part on a consumer’s ability to repay it. Klarna said its policy of revoking access after missed payments – and increasing purchase limits based on on-time payment behavior – is designed to encourage responsible spending.

Here’s what you need to know about Buy Now, Pay Later apps, and the important differences between the services.

Make payments or pay interest

Payment schedules vary by service, but generally the cost of a purchase is broken down into four interest-free installments paid over six weeks.

Afterpay customers are required to refund in full within six weeks. When customers miss a payment, the company revokes access to the Afterpay platform and charges late fees for the missed payment. The company said 95% of transactions do not incur late fees.

Affirm allows for the flexibility of staggering purchases from six weeks to 60 months, with 0% to 30% interest, the company said, depending on the merchant, product, and their subscription process. The company said its bi-weekly payments are still interest-free.

Affirm’s interest rate and options are determined by the amount of the purchase, the merchant’s terms, the use of credit, and other existing loans the consumer may have with the business. If you buy a $ 1,000 couch with Affirm and choose to pay it off over a year, you could be offered an interest rate of 16%. This means that you would pay around $ 97 per month.

Keep track of your purchases carefully, said Chelsea Ransom-Cooper, managing partner and financial planner at Zenith Wealth Partners. Using this payment method for multiple small and medium sized purchases at the same time can add up quickly, Ms. Ransom-Cooper said.

Reimbursement for most services is automated by default. Klarna asks users to connect their debit card, credit card, or bank account, for example. Most services also send text reminders of an upcoming load.

When to use it

Only use buy now, pay later for things you can’t pay on your monthly credit card bill, Ms. Ransom-Cooper said.

“Relying on these apps for emergency shopping can be a useful way to give yourself a little more time than your credit card,” she said.

Another advantage of these services are favorable borrowing terms for those with little credit or a short credit history, especially for larger purchases, according to financial analysts.

If used responsibly, buying now, paying later can “level the playing field” for those without access to credit, said Sheridan Trent, research analyst at the Strawhecker Group, a consulting firm specializing in electronic payments.

Know what you are not getting

While consumers are essentially encouraged to borrow money and repay it in a timely and responsible manner, as they would with a credit card, these payments do not necessarily help them build a credit history, have said financial analysts and authors.

“You took out a loan that because it is not a revolving line of credit the chance of it being negative on your credit, as opposed to positive, is higher,” Grant Sabatier said. , co-founder of BankBonus.com and author of “Financial Freedom”, referring to Affirm loans.

Affirm does not report payments on its four zero-interest bi-weekly payments, he said, or when consumers are offered a three-month interest-free payment option. Afterpay does not work with credit bureaus at all. Sezzle Up explicitly informs users that it will report payments on time to Equifax and TransUnion.

Miss a payment

Just like with a credit card, late payments have consequences for buy-it-now, pay-later services.

Affirm does not charge a late fee, but late or partial payments can adversely affect your credit score and may prevent you from using the service in the future. Sezzle Up also reports unpaid bills.

Klarna and Afterpay revoke access to their platform until payment is made. Both companies also charge late fees, added to your next payment. Afterpay charges $ 8, or 25%, of the purchase, whichever is less, while Klarna charges a maximum of $ 7, or no more than 25%, of the overdue amount. Klarna said she will contact users to collect payment before charging late fees.

Financial planners stress the importance of keeping track of your installment payments, just as you would any bill.

“Documenting the payment schedule will help you fit the payments into your budget,” Ms. Ransom-Cooper said.

Kristen Euretig, certified financial planner and founder of Brooklyn Plans, said her new clients who use the Buy Now, Pay Later apps often pay the first installment and forget about the remaining fees during the admission session.

“It’s not something that comes to people’s minds,” she said. “Student loans, of course. Credit cards, yes. And then it is technically a debt that must be repaid. So it seems like it doesn’t stay on people’s minds the same way. “

Try not to make it a habit

The Buy Now, Pay Later apps are designed to encourage repeat purchases by making it easier to buy items without paying full price right away, said Mark Palmer, managing director and fintech analyst at financial services firm BTIG.

“It’s almost part of their way of life as a consumer to buy things using Buy Now, pay later and have access to them weeks before they can do it otherwise,” M said. Palmer.

The services are designed to eliminate the checkout process as much as possible, which can make spontaneous purchases easier and faster, says Euretig.

“It’s very wise,” she said. For most services, the Pay Later button is right next to the Buy button. This allows the consumer to choose either option just as easily.

“There is a way out of realizing that you cannot afford this right now. “

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