Money Fix: Point of Sale lenders offer a new twist on 'buy now, pay later'

Buy now and pay later. That’s how it goes with point of sale lenders like Affirm, Afterpay, Klarna, QuadPay and Sunbit. According to new research from Bankrate.com, consumers are increasingly turning to POS lenders to meet their financial needs.

Ted Rossman, industry analyst for CreditCards.com explains how it works: “Point of sale lenders are sometimes called reverse layaway. Basically, they’re an alternative to traditional credit cards and loans. The consumer buys something (clothes, electronics, etc.) and gets it now (as opposed to traditional layaway in which you need to make all of the payments before taking the item home).”

You borrow at the store at the time of purchase and pay back the money over a specified period of time, unlike most credit cards that offer revolving credit. Some of the providers offer interest-free financing for a time (such as six weeks), whereas others charge interest right away, says Rossman.

These services are widely available. “Some of them are linked to participating retailers (such as Affirm, which partners with Walmart among others, and Afterpay, which partners with companies such as Forever 21, Mac Cosmetics and Billabong to offer loans). Others (like Klarna) can be used at any website (they give you a ‘ghost card’ number to input at checkout),” says Rossman.

So, you can easily get your hands on this alternative form of credit. Should you?

The pros

“These options can be convenient, accessible to people with lower access to credit, and their finite timelines can help prevent consumers from spiraling into debt. For someone with a limited credit file, it can also be an opportunity to build a good credit history,” says Arad Levertov, CEO of Sunbit, a fintech company based in Los Angeles that allows customers to split any payment at the point of sale into equal monthly payments.

Another plus, says Rossman: “Many consumers like the predictability of these plans; they know exactly how much they owe and how many months they have to pay it off.” 

The cons

As with any planned borrowing, consumers should learn about any potential hidden costs associated with their loan and they should price shop for the best deal. “Hidden costs could arise as late payment fees and deferred interest. Consumers can price shop by calculating the total cost (including any interest and fees) of purchasing the good on a newly opened credit card with a fixed annual percentage interest rate for the same number of months as their planned installment loan,” says Ariel Zetlin-Jones, associate professor of economics at Carnegie Mellon University's Tepper School of Business in Pittsburgh.

Rossman raises his concerns: “By definition, a point of sale loan appeals to someone who doesn’t have the means to pay for it right now. And even if there’s supposedly a low interest rate (or no interest at all) for a clearly defined term, borrowing for something that you can’t afford now but hope to be able to afford in a few weeks or months is a dangerous proposition. It could lead to missed payments, late fees and damaged credit scores.”

He adds that while your credit score could be hurt if you pay late, POS loans don’t usually help your score if you pay on time, because they don’t typically report to the credit bureaus.

The bottom line, says Rossman: “You’re better off establishing strong credit histories via credit cards (even if that means starting with a card that’s easy to get and lacks a primo rewards program, such as a secured card or a student card). You can build from there and move on to better rewards programs.”

Credit cards also offer better consumer protections, he says. “Point of sale lenders focus on discretionary purchases — generally not food and shelter — so it’s important to avoid this sort of consumer debt.”

CORRECTION: The statement “Many consumers like the predictability of these plans; they know exactly how much they owe and how many months they have to pay it off,” was made by Ted Rossman, industry analyst for CreditCards.com. It was attributed incorrectly in an previous version of the story.