Installment loans for online shopping: what you need to know

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When you go to check out your favorite online stores this holiday shopping season, you may notice that your payment options have expanded beyond credit or debit cards. But there is a lot to learn about these new services – or you could do without them.

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

Companies like Afterpay, Quadpay, Klarna, and Affirm, for example, offer buyers an instant finance option, just when they’re about to purchase an item anyway, which works like a micro installment loan. . Depending on the service, these loans can carry zero percent interest and be repaid in as little as six weeks with four equally distributed installments. Or they can come up 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 those plans can be found on the payment pages of department 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, is appealing to many buyers, especially the younger ones who don’t tend to use traditional credit cards and can find them intimidating. “People like the predictability of these payments and knowing exactly when they will end,” says Jaclyn Holmes, director of Auriemma Research, whose company has researched installment payment plans.

Almost 40% of those polled this year by consultancy firm 451 Research, in data published at The Wall Street Journal, said they would be more willing to close a deal if they had the option to fund the purchase at the cash desk.

This willingness will likely increase in December, given the holiday pressure to find the perfect gift to spoil your loved one. More than a quarter of people already expect to go into debt to finance their Christmas shopping, and around one in ten intends to take out a personal loan, according to a survey conducted by CreditKarma.

Why retailers love payment plans for online shopping

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

Competitor Affirm, which PayPal co-founder Max Levchin launched in 2012, is experiencing similar growth. Affirm typically offers larger loans than Afterpay, with 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 a loan volume of $ 2 billion, double the previous year.

Buyers aren’t the only ones who sign up quickly, either. Almost all of the major retailers seem 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 chunk of revenue actually comes from retailers who pay a small percentage of every sale made through their finance options. In return, retailers expect to sell more.

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

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

Popular with millennials and millennials

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

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

Auriemma ResearchStudying these payment plans also revealed that because this financing option provides a clearer path and repayment 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 will pay in interest or when they will be paid off,” says Holmes.

The transparency of these plans is not the only advantage. Buyers who know that a return is likely to occur, perhaps because they are trying on multiple sizes in an item of clothing or ordering different outfit choices for an event, can use an interest-free plan to avoid the total amount of the purchase is removed from their account and then blocked for several days while waiting for the store to receive the returned items and issue the refund.

How to avoid fees

While some of these services may carry a zero percent interest rate, it’s important to remember that they’re still a finance option. You’re always borrowing money, which suggests that you’re probably spending more than you can actually afford or don’t feel comfortable spending.

And you are about to pay off that loan, which means that unlike swiping your debit card or using cash, you could face late fees, interest charges and more. even downgrades to your credit score.

While 95% of people around the world pay off their loans on time with Afterpay, the company says if you don’t, you could face a $ 8 late fee per unpaid installment, although the total late fee is capped at 25% of the original order value. Affirm does not charge any late fees for its loans, but unpaid debts can be sent to collections and if, 90 days past due, 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 little bi-monthly or monthly bills can add up and affect your overall budget, possibly reducing the funds needed to pay for essentials like rent or money. the grocery store.

Affirm says people borrow about $ 700 on average per transaction with the business, while Afterpay users borrow less, around $ 150 per transaction, but come back more frequently. In Australia and New Zealand, people who had used Afterpay for more than two years resumed 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 clothing and makeup.

“These services can be quite dangerous. They play on our desire to have something that outweighs the real calculations of what we can afford, ”says Kit Yarrow, consumer psychologist. “The split payments may make us believe that those $ 200 boots are only $ 50, because that’s the payout we’re seeing, and we explain 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 spending too much money, causing you to lose track of how much money is leaving your home. bank account every week, so it is essential to use them. services sparingly and assess whether the pleasure of owning these items will outlast the term of payment.

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