The all-too-easy buy-now-pay-later options appearing everywhere you spend your money online are likely to get a boost from rising interest rates this year. Zero-percent interest on smaller payments will look even more tempting for shoppers already wary of the 16% average interest rate assessed on credit-card balances.
But buyers better beware. Buy now and pay later can wind up being a worse deal for consumers. Unlike credit cards, where the terms are expressed in a standardized way among issuers, these new payment plans are all over the map and require more vigilance to be sure you know what you're getting into. Let your guard slip and you might find yourself paying even more than that credit card would have charged you.
For anyone still unfamiliar: This is about the ubiquitous button that pops up when you’re shopping online and ready to check out, asking if you want to pay the full amount or, instead, divvy it up into four or six installments over a set period of time.
Retailers partner with different payment platforms — Klarna Bank AB, Affirm Holdings Inc. and Afterpay Ltd. are among the biggest — and the platforms provide a short-term loan before you make payments at regular intervals. The platforms make most of their money by charging fees to retailers, which are willing to pay because they know shoppers will buy more stuff if they don’t have to pay for it all up front. Global sales for these platforms are about $100 billion, and Bloomberg Intelligence estimates volumes could jump 40% a year through 2023.
But here’s one of the problems: There are more than two dozen providers and they all work differently. Some just allow consumers to make interest-free payments over a short period of time, while others offer longer-term financing that charges interest (much like a credit card).
Many offer both options, which is where it can get confusing. Shoppers may start out using one of these payment apps for 0% interest loans, but then they get offered a loan with interest and bite. In that case, the rates they get charged could be the same if not higher than they'd face with a credit card.
For those buy-now-pay-later providers that do charge interest, the terms may vary depending on the retailer and a consumer's credit profile. For example, Affirm charges interest rates that range from 0% to 30% for purchases from Amazon, arts and crafts store Michael’s, and Peloton.
Unlike credit cards, there aren’t strict regulations mandating standardized disclosures of terms and conditions. Following legislation in 2009, every credit-card issuer was required to provide clearer explanations up front of its rates and fees. There’s no such requirement for buy-now-pay-later networks. A consumer has to go to each provider’s website to figure out the penalties for missing a payment and what the interest rate could potentially be.
The Consumer Financial Protection Bureau started an inquiry late last year into the burgeoning industry, asking five of the biggest players to provide data so the consumer watchdog can have a better handle on its risks.
In the meantime, for a careful consumer, there are times when buy now, pay later may be more attractive than a credit card. For example, if it’s being used for a necessary item that the user wouldn’t be able to afford without breaking it up into smaller payments.