By Kerri Anne Renzulli
November 26, 2019
Illustration by José Vélez

When you go to check out at your favorite online stores this holiday shopping season, you may 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 get in over your head.

Operating like a kind of reverse layaway plan, a slate of new services embedded within stores’ checkout systems want to help you buy and enjoy all those items in your cart now while paying for it later.

Companies like Afterpay, Quadpay, Klarna, and Affirm, for example, offer shoppers an instant financing option, right as they are about to buy an item anyway, that operates as a micro installment loan. Depending on the service, these loans can come with zero percent interest and be paid back in as little as six weeks with four evenly split payments. Or they can come with a 30% interest rate and take 39 months to pay off.

The concept isn’t new. If you’ve ever opted for a monthly payment plan for a new iPhone, piece of 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 finance smaller and less essential purchases.

And the chance to split up payments for a new T-shirt or pair of shoes, instead of paying the full amount upfront, is appealing to a lot of 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 knowing exactly when they will end,” says Jaclyn Holmes, director of Auriemma Research, whose firm has studied installment payment plans.

Nearly 40% of people surveyed this year by advisory firm 451 Research, in data released to The Wall Street Journal, said that they would be more willing to complete a transaction if they had the option to finance the purchase at checkout.

That willingness will likely increase come December, given the holiday pressure to find the perfect present to spoil your loved one. More than a quarter of people are already expecting to go into debt to finance their yuletide shopping, and about one in ten intend to take out a personal loan, according to a survey conducted by CreditKarma.

Why Retailers Love Online Shopping Payment Plans

Australian-based Afterpay, which offers zero-percent interest rate loans that must be paid back in four even bi-weekly payments, 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 Max Levchin, co-founder of PayPal, launched in 2012, is seeing similar growth. Affirm typically offers larger loans than Afterpay, charging interest rates between 0% to 30%, depending on a person’s credit history and the retailer, that can extend for a few weeks up to 39 months. Affirm has more than 3 million active users and finished 2018 with $2 billion in loan volume, double the previous year.

Shoppers aren’t the only one’s rapidly signing up either. Almost every major retailer seems to have at least one of these partnerships running on their checkout page. Afterpay works with more than 9,000 shops in the U.S., while Affirm has more than 3,000.

While these services do make some money from charging late fees or interest fees, quite a bit of 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 these installment loan companies make and they are definitely touting that it will boost conversion rates and reduce the high percentage of cart abandonment many retailers face. Merchants will lose fewer customers in the journey to the checkout” says Holmes.

And while Holmes and the Auriemma Group have no concrete numbers to back up the claims of these point-of-sale installment loan services, the fact that Afterpay saw a 96% increase in retailer signups in a year suggests they likely are doing as advertised and driving greater online sales.

Popular with Millennials and Gen Z

The rising popularity of these services lays mostly with 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, used a debit card to enroll with the service, while users younger than that did so 91% of the time.

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

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

The transparency of these plans isn’t the only perk. Shoppers who know a return is likely to occur, maybe because they are trying out multiple sizes in a clothing item or ordering different outfit choices for an event, can use a zero-interest plan to avoid having the full purchase amount withdrawn from their account and then tied up for several days as they wait for the store to receive the returned items and process a refund.

How you can avoid fees

Even though some of these services may come with a zero-percent interest rate, it’s important to remember that they are still a financing option. You are still borrowing money, suggesting you’re likely spending more than you can actually afford or more than you feel comfortable spending.

And you’re on the hook to repay this loan, meaning unlike with swiping your debit card or using cash, you could face late fees, interest rate fees, and even credit-score dings.

While 95% of people globally repay their loans on time with Afterpay, the company says, if you fail to do so you could face a late fee of $8 per outstanding installment, though total late fees are capped at 25% of the original order value. Affirm doesn’t charge any late fees for its loans, but unpaid debts can be sent to collections and if, 90 days delinquent, will be reported to the credit bureaus and could negatively impact your credit score.

But the real concern isn’t about making these payments, it is about how these small bi-weekly or monthly bills might add up and affect your overall budget, maybe cutting into the funds needed to pay for essential items like rent or groceries.

Affirm says people borrow about $700 on average per transaction with the company, while Afterpay users borrow less, about $150 per transaction, but come back more frequently. In Australia and New Zealand, people who’d used Afterpay for more than two years returned to the service 22 times a year. That means if they spent that $150 average each time, in a year they would have borrowed $3,300 for nonessential items like clothing and makeup.

“These services can be pretty dangerous. They’re playing on our desire to have something outweigh the actual calculations of what we can afford,” says consumer psychologist Kit Yarrow. “Splitting the payments up can trick us into thinking those $200 boots are only $50, because that’s the payment we see, and we rationalize that it is only $50 for now.”

So while these services can help you afford necessary purchases and skirt by credit card interest rates, they can also tempt you in overspending, leading you to lose track of just how much money is leaving your bank account every week, so its key to use these services sparingly and weigh whether the thrill of owning these items will outlive the payment duration.

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