November/December 2021 Issue
“Buy now, pay later” loans are the fastest-growing way to pay for goods and travel online, and if you haven’t noticed them yet, you likely will before your holiday shopping is done.
Many e-commerce retailers and some brick-and-mortar merchants are rushing to offer these short-term installment loans at checkout through third-party companies such as Affirm, Afterpay, Klarna, Paypal, and Sezzle.
Buy now, pay later (BNPL) loans are the opposite of layaway plans, where buyers pay for a purchase over time and take it home when the full price is met. With BNPL, also called point-of-sale financing, shoppers get the merchandise upfront and pay for it over several weeks or months. The most common plan, “pay-in-four,” requires 25 percent down with the balance paid in three bimontly installments.
They’re billed as being quick, easy, and free, and sometimes they are. Most charge no fees or interest if they are paid on time. But every provider has different approval criteria, terms, late penalties, credit limits, and credit-reporting policies.
If you get multiple loans, “you have to keep track of which day [they are] going to hit your checking account,” says Chuck Bell, programs director with Consumer Reports. They could get costly if you rack up late fees and overdraft charges, or if they cause you to overspend.
Here’s how they work, and what to watch out for.
Merchants typically have partnerships with one or two BNPL companies whose names appear at checkout. Target partners with Sezzle for small-ticket items and with Affirm for purchases over $100. Afterpay, which is being acquired by Square, is popular with apparel retailers. Many travel providers use Uplift.
You provide information—such as your name, address, phone number, date of birth, and Social Security number—to the BNPL company at checkout or on its app. You’ll get approved or denied almost instantly, and then repay the loan with a debit card, credit card, or electronic bank transfer.
Most BNPL lenders do a “soft inquiry” on your credit report, which does not affect your credit score. Traditional lenders do a “hard inquiry,” which may ding your score.