The pros and cons of installment payment apps

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If you’re one of those who frequently shop online for family needs, it’s probably no flash that “buy now, pay later” (BNPL) options are becoming more commonplace at checkout. Names like Klarna, Affirm, Sezzle, and Afterpay, which may have been unknown to many just two years ago, are popping up on nearly every e-commerce website these days.

BNPL companies, which offer short-term financing (sometimes called point-of-sale installment loans), allow consumers to make purchases and pay for them later. In many cases, financing is even offered interest-free. All of this can be very tempting if your family is on a tight budget or you run out of money when a major need arises.

But not so fast. While “buy now, pay later” might seem like a wonderful solution in a pinch, this approach to everyday shopping can also have drawbacks for your family budget. Here’s an overview of how these apps work and what to avoid.

What are installment payment apps?

“Buy now, pay later” is a type of financing that has proliferated in recent years. Forbes reported that among Gen Z, the use of BNPL increased sixfold between 2019 and 2021, from 6% to 35%. Millennials are also taking advantage of these emerging payment options: usage doubled over the same two-year study period, to 41%.

This growing popularity has resulted in consumers making nearly $100 billion in retail purchases using BNPL options in 2021, which is a giant leap from just $24 billion in 2020.

But what exactly are installment payment apps?

“Buy now, pay later is a type of financing that allows consumers to spread the cost of a purchase over multiple installments,” said Mike Rittler, head of retail card services at TD Bank.

Typically, BNPL apps allow consumers to make four equal payments over a period of weeks or months, although various providers have different repayment terms, Rittller adds. Moreover, these apps usually have low interest rates or charge no interest if consumers make payments on time.

Is there any credit impact when using installment payment apps?

So far, the “buy now, pay later” approach to making purchases appears to have very little impact on consumer credit rating, either positively or negatively, according to industry analysts.

“A lot of people are drawn to ‘buy now, pay later’ because these lenders aren’t typically as selective about credit quality,” says Ted Rossman, senior industry analyst for Bankrate. “But to date, most buy-it-now, pay-later plans won’t help you build your credit either. So you’re not getting closer to that ultimate goal of having a high credit score.”

An exception to this rule, Rossman says, is Affirm, which reports some of its longer-term repayment plans to Experian. However, the landscape is about to change when it comes to the lack of credit implications – or benefits – when using BNPL.

“Credit reporting is about to become much more prevalent in the ‘buy now, pay later’ space, as Equifax announced plans to integrate a wider variety of buy now, pay later plans. in his credit reports this quarter,” continues Rossman. “It is still unclear exactly how this will work. For example, the industry needs to understand how to deal with things like credit usage and account age. If these nuances are not properly considered, there could be have unintended consequences for consumers.”

Are installment payment apps safe?

For the most part, BNPL apps are very safe in terms of protecting your family’s financial information and other personal data and details. But that doesn’t mean that everything went well with this payment method.

“There have been complaints about returns and other disputes,” says Rossman. “For example, sometimes people return an item, but the ‘buy now, pay later’ business still wants its cut. That’s the kind of thing that can be confusing when a middleman is involved.”

The biggest risk of “buy now, pay later”? It is more likely that it is simply overspending, either due to a lack of financial discipline on the part of the consumer or a lack of thorough underwriting on the part of the lender. The Consumer Financial Protection Bureau recently announced that it was taking a closer look at these potentially concerning issues, Rossman says.

How can BNPL apps help families make ends meet?

For families on a tight budget, BNPL can be an attractive solution, which does not generate interest and does not require an excellent credit score.

“Buy now, pay later businesses give people the opportunity to finance a purchase that they may not be able to pay off right away, but potentially at a lower interest rate and over a shorter term than a credit card,” says Rossman. Or at the very least, you know exactly how much you owe for exactly how long. That predictability and that light at the end of the tunnel is key.”

This type of financing, which once catered primarily to younger consumers who did not have a lot of cash on hand or a strong credit score, has since expanded to appeal to a more diverse group of buyers, including those who are more affluent and use “buy now, pay later” to make expensive purchases.

“They use ‘buy now, pay later’ for things like Peloton bikes, potentially paying around $50 a month for up to 43 months with no interest from Affirm,” says Rossman.

At the same time, the BNPL space has also grown to attract a growing number of family shoppers, many of whom spread the cost of items needed for children or major living expenses.

“‘Buy now, pay later’ can help families deal with big one-time expenses,” says Annie Millerbernd, personal loan expert at NerdWallet. “It works best when you use it for a big purchase, when splitting expenses would take the stress off your budget. If it’s time to buy some new school clothes or you’re planning a family camping trip , breaking a big buying spree into smaller, interest-free payments can make it much more manageable.”

That said, it’s important that buyers, whether family or not, evaluate each purchase and payment plan within their overall budget, rather than in a vacuum, adds Rittler of TD Bank. If not managed properly, these loans can easily pile up and soon your family budget is completely out of whack or you are overwhelmed.

“For example, a shopper might decide that they can afford a payment of $100 every two weeks in order to purchase a desired item,” Rittler explains. “But if they make that assumption three times on a shopping trip, they’re now looking at $300 every two weeks, which can take $600 off their monthly budget.”

What are the general pros and cons of installment payment apps?

As mentioned by financial experts throughout this article, the biggest potential downside of using the BNPL is that it can easily encourage spending far beyond your household budget.

Additional downsides include a lack of strong buyer protection for things like returns, dispute resolution, purchase protection and extended warranties, Rossman says. “Credit cards are superior in this regard, and credit cards have much more attractive reward programs,” notes Rossman. “Most buy now, pay later plans don’t offer rewards.”

The biggest benefits when taking advantage of BNPL are the ability to spread purchases over a predictable payback cycle and being able to purchase what you need right away. And if your credit score isn’t ideal, BNPL offers lending standards that are more lenient than most credit cards.

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