There was a time when shopping at almost every US retailer included the ability to pick an item you were looking for and put it in a back room while you made incremental payments until the purchase price was over. covered and you can take it home.
These layaway plans mostly died out decades ago, as credit cards became the go-to option for consumers to cover the cost of products they couldn’t quite afford for. the moment. In-store financing has also become a thing for many stores, especially those that carry big-ticket items like furniture and appliances.
Today, a tech-driven option that strikes a kind of middle ground between layaway financing and store financing is on the rise, and like the buying plans that came before, it could cost you dearly. .
Buying now-pay-later doesn’t seem like a particularly new idea, but a growing number of technology platforms are successfully partnering with retailers to offer point-of-purchase credit issuance portals that empower the consumer to verify, virtually or in person, with their freebies after agreeing to an installment plan. Some charge interest, some don’t, and rescheduling a payment or paying late can also incur a fee.
Although U.S. consumers have seen record household savings rates over the past two years due to pandemic conditions that have dampened many discretionary spending, the new systems of buy now-pay later are, everything. simply, a kind of killing. this.
On Wednesday, Adobe Analytics reported that the number of online holiday shopping orders paid with Buy It Now and pay plans later this year was up 466% from 2019 and the value of those purchases in 447% increase from two years ago.
But why not just use a credit card?
Buy-it-now and late-pay providers have carved out a niche in consumer finance, using real-time ‘soft’ credit surveys that do not display credit scores, do not appear on the report applicant’s credit and, if a credit is issued, does not report new debt obligations to the credit bureaus. This opens the door for applicants who may not qualify based on their scores, who want to avoid maximizing current credit cards, or who simply don’t have enough credit history to pass a more in-depth credit assessment. .
In a recent report by Investors.comMichael Linford, chief financial officer of the Affirm Buy It Now platform, said there are motivations beyond credit issues pushing consumers toward new installment payment options.
“Users range from the full spectrum of credit, from very high FICO scores with impeccable credit to people wary of revolving credit vehicles to people with thin or no credit records,” Linford said. .
To be clear, not all buy-now providers offer interest-free payment plans, and the Linford company is perhaps the most notable of them. Affirm has made deals with Amazon, Walmart, Peloton, Wayfair and others and rates interest rates on installment plans ranging from 0% to 30% depending on the applicant’s credit, according to the company.
Walmart was one of the few large U.S. retailers to put shoppers aside, but recently ditched the option, now offering Affirm financing in place of customers who want to pay over time.
Instead of interest-generated income, many of these newer credit issuers earn income from merchant fees which are significantly higher, 4-5% of the purchase value, than what stores pay to credit issuers. credit cards, approximately 2% of the purchase value, depending on Investor.com.
A July report from McKinsey and Co. found that about 65% of consumers making âbuy now, pay laterâ purchases had credit scores above 700, and noted that the transactions Affirm brokered with Peloton, the maker of exercise bikes and bikes. expensive equipment, involved consumers with an average credit score of 740.
McKinsey analysts also reported that about 60% of consumers say they are likely to use some type of point-of-sale financing in the next six to 12 months.
Some personal finance experts warn the allure of zero-interest financing and light credit checks, combined with the zealous shopping spree of the holiday season, could have dire financial consequences for unwary consumers.
Last month, CNBC reported 1 in 3 Americans Expect to Take on Debt This Holiday Shopping Season, October Report Says Karma credit check. But regardless of how people plan to purchase their vacation items, consumers should be mindful of their spending and any interest or late fees that may be part of the credit card or buy it now-pay models. later.
Whether purchases are made through a Buy It Now service or with a credit card, “consumers need to fully understand the transaction,” an Afffirm spokesperson told CNBC.
âPeople tend to lose their minds, financially speaking, just around the time of Black Friday,â said John Ulzheimer, a credit expert. âSo when you combine a higher delinquency rate with more debt, which happens at the end of the year, because of the holiday shopping activity, you are combining two pretty dangerous things. ”