Installment loans for online purchases: what you need to know

When you go to pay at your favorite online stores this holiday shopping season, you might notice that your payment options have expanded beyond credit or debit cards. But there’s a lot to learn about these new services – or you could be without them.

Working like a sort of reverse layaway plan, a list of new services built into store checkout systems want to help you shop and enjoy all those items in your cart now while paying for them later.

Companies like Afterpay, Quadpay, Klarna and Affirm, for example, offer shoppers an instant financing option, just when they’re about to buy an item anyway, which works like a micro installment loan. . Depending on the service, these loans can carry zero percent interest and be paid off in as little as six weeks with four equally-split payments. Or they can come with a 30% interest rate and take 39 months to pay off.

The concept is not new. If you’ve ever gone on a monthly payment plan for a new iPhone, furniture, or even braces, you know the drill. But now these plans can be found on the checkout pages of major stores, like Walmart, Anthroplogie, Nordstrom, Urban Outfitters, Ulta and Revolve, as a way to fund smaller, less essential purchases.

And the ability to split payments for a new t-shirt or pair of shoes, instead of paying the full amount up front, appeals to many shoppers, especially younger ones who don’t tend to use traditional credit cards and may find them intimidating. “People like the predictability of these payments and know exactly when they will end,” says Jaclyn Holmes, director of Auriemma Research, whose company has studied installment payment plans.

Nearly 40% of people polled this year by consultancy 451 Research, in data published in the Wall Street Journal, said they would be more willing to close a deal if they had the option of financing the purchase at the box.

This desire will likely increase in December, given the pressure of the holidays to find the perfect gift to spoil your loved one. More than a quarter of people already expect to go into debt to fund their Christmas shopping, and about one in ten intend to take out a personal loan, according to a survey by CreditKarma.

Why Retailers Love Online Shopping Payment Plans

Australia-based Afterpay, which offers zero-interest loans that must be repaid in four installments, even every two weeks, ended October with 2.6 million active users, jumping 50 % in just four months. Overall sales more than doubled last year to $3.5 billion.

Competitor Affirm, which PayPal co-founder Max Levchin launched in 2012, is seeing similar growth. Affirm typically offers larger loans than Afterpay, charging interest rates between 0% and 30%, depending on a person’s credit history and the retailer, which can range from a few weeks to 39 months. Affirm has over 3 million active users and ended 2018 with $2 billion in lending volume, double the previous year.

Shoppers aren’t the only ones signing up quickly, either. Almost every major retailer seems to have at least one of these partnerships running on their checkout page. Afterpay works with over 9,000 stores in the United States, while Affirm has over 3,000.

While these services make money by charging late fees or interest charges, a good portion of the revenue actually comes from retailers paying a small percentage of each sale made through their financing options. In return, retailers expect to sell more.

“I’ve heard the sales pitches from these installment loan companies and they certainly claim that it will increase conversion rates and reduce the high percentage of cart abandonment that many retailers face. Merchants will lose fewer customers on the way to the checkout,” says Holmes.

And while Holmes and the Auriemma Group don’t have hard numbers to back up claims of these point-of-sale installment loan services, the fact that Afterpay has seen a 96% increase in retailer sign-ups in one year suggests they probably do as advertised and drive more online sales.

Popular with Millennials and Gen Z

The growing popularity of these services is driven primarily by younger shoppers, Millennials and Gen Z, and heavy debit card users. Afterpay notes that 86% of its users between the ages of 23 and 36 have used a debit card to sign up for the service, while younger users have done so 91% of the time.

The reason? With only one in three young millennials even owning a credit card, according to a Bankrate survey, and many reluctant to start using them, preferring to pay cash or debit for discretionary purchases, these services appear to offer a form of borrowing more attractive.

Auriemma Research’s study of these payment plans also found that because this financing option provides a clearer repayment path and schedule, people feel more in control and find it easier to budget. “There’s a light at the end of the tunnel, unlike a credit card where they don’t know exactly how much they’ll pay in interest or when they’ll be paid back,” says Holmes.

The transparency of these plans is not the only advantage. Shoppers who know a return is likely to occur, perhaps because they’re trying on multiple sizes in a garment or ordering different outfit choices for an event, can use a zero-rate plan to avoid the full amount of the purchase is removed from their account and then held for several days while the store receives the returned items and processes the refund.

How to avoid fees

Although some of these services may carry a zero percent interest rate, it is important to remember that they are still a financing option. You’re still borrowing money, which suggests you’re probably spending more than you can actually afford or more than you feel comfortable spending.

And you’re obligated to repay that loan, which means unlike reading your debit card or using cash, you could face late fees, interest rate charges, and even credit problems.

While 95% of people around the world repay their loans on time with Afterpay, according to the company, if you don’t, you could face late fees of $8 per unpaid installment, although late fees totals are capped at 25% of the original order value. . Affirm does not charge any late fees for its loans, but unpaid debts may be sent to collections and if 90 days late will be reported to the credit bureaus and could negatively impact your credit score.

But the real concern isn’t making those payments, but how those small bi-weekly or monthly bills can add up and affect your overall budget, perhaps reducing funds needed to pay for essential items like rent or the grocery store.

Affirm says people borrow around $700 on average per transaction with the company, while Afterpay users borrow less, around $150 per transaction, but return more frequently. In Australia and New Zealand, people who had used Afterpay for more than two years returned to the service 22 times a year. This means that if they spent that average $150 each time, in a year, they would have borrowed $3,300 for non-essential items like clothes and makeup.

“These services can be quite dangerous. They play on our desire to have something that outweighs actual calculations of what we can afford,” says consumer psychologist Kit Yarrow. “Splitting the payouts can trick us into believing that those $200 boots are only $50, because that’s the payout we see, and we’re rationalizing that it’s only $50 right now. “

So while these services can help you pay for necessary purchases and bypass credit card interest rates, they can also trick you into overspending, causing you to lose track of how much money is leaving your account. banking each week, so it is essential to use them. services sparingly and assess whether the enjoyment of owning these items will outlast the term of payment.

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