Buy now, pay later, plans don’t charge you a fee, should you take advantage?

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If there was any doubt that the rapid expansion buy now, pay later the industry is here to stay, new developments have put this issue to bed.

In recent months, the country’s two largest retailers have announced or formalized partnerships with popular buy-now, late-pay vendors, making these payment plans virtually inevitable for most buyers.

But is this type of financing, which allows you to split your shopping bill into a series of small installments, the right way to finance your next purchase?

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Large retailers look to new payment plans

Most recently, Walmart WMT,
+ 0.73%
announced that it would formally end its layaway service ahead of the 2021 holiday shopping season, turning to Affirm AFRM instead,
+ 4.62%,
who offers buy now, pay later. While the store has partnered with Affirm since 2019, moving away from the layaway will likely push more shoppers who need more time to pay to request the service.

“We have learned a lot over the past year as the needs and buying habits of our customers have changed,” Walmart said in a statement. “This past holiday season, we removed seasonal layaways from most of our stores with the exception of certain jewelry items in certain stores, and based on what we have learned, we are confident that our payment options offer the right solutions for our customers. “

In August, Amazon AMZN,
+ 2.75%
also announced an exclusive partnership with Affirm, allowing certain purchases of $ 50 or more to be split into smaller installments. The feature is expected to be widely rolled out in the coming months.

Greg Fisher, Director of Marketing at Affirm, says the company prides itself on being the most user-friendly supplier to buy now, pay later, charging no fees, including no late fees. Affirm also uses machine learning in its underwriting process, which Fisher says leads to a higher loan approval rate than its competition, while ensuring that the borrower can repay it comfortably.

“We see ourselves being selected by a lot of these great merchants who matter because of the way we treat people,” he says.

But Affirm isn’t the only big player making waves. This summer, Square SQ,
-1.99%
announced its acquisition of Afterpay, an Australia-based payment plans provider with a strong presence in the United States, for a whopping $ 29 billion.

And the first rumbles of Apple’s AAPL,
-0.35%
Inbound Buy Now, Pay Later Product has driven competitors’ stock prices down, reflecting a market that is only getting more ambitious.

So how do you buy now, pay later, does it work?

Buying Now, Paying Later gives buyers exactly what the name suggests – the ability to get something now but pay for it later.

Plan structures vary by company, but one of the more popular iterations splits your purchase into four equal installments, with the first installment due upon checkout and the remaining three each due two weeks apart.

For example, if your total is $ 200, you will pay $ 50 at checkout, then three installments of $ 50 over a six-week period. These payments are often automatically billed to the debit or credit card you used to make the initial payment.

Unlike credit card issuers, a lot of businesses buy now, pay later, don’t raffle when you apply. They may perform a gentle pull, which won’t affect your credit score, or – in the case of Afterpay – they may not check your credit at all.

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Because they don’t need strong credit, Buy It Now and Pay Later plans are available to buyers without a bad credit history or bad credit.

Many plans don’t charge interest, which means if you pay on time, you’ll only pay the cost of your purchase. But it is not guaranteed. Although Affirm offers interest-free financing, depending on the retailer, it can charge up to 30% interest.

Buying now, paying later, is it a good idea?

Whether you should go for one of these payment plans isn’t obvious, but here’s what to keep in mind.

Buy now, pay later, businesses make money in part by charging merchants a fee. They can do this, the argument goes, because they bring more business to the merchant – in other words, buyers buy more, thanks to their service.

It’s easy to see how this could happen. Imagine that your budget today is $ 100. With a traditional pay-in-four plan, you can actually buy up to $ 400 worth of merchandise, as only $ 100 would be due at checkout.

To avoid this temptation, Joe Bautista, an Oregon-based certified financial planner and registered investment advisor at Grow With Joe, advises a 24-hour cooling off period between placing in your cart and paying. This can help you decide if you really want whatever you are buying or if you are just excited about the bargain price you could get for it.

“A period of reflection can really help you have this awareness of yourself: ‘Is this something that is really precious to me, or is it something where I’m just caught in the moment and I’m going to regret it. later?’ He said.

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Bautista recognizes that buying now, paying later can be a smart way to budget for big-ticket items without having to dip into an emergency fund, especially if you get an interest-free offer. He encourages buyers to make sure they understand the plan they are buying into and can afford the payments.

Last thing: keep an eye on that total balance. Whether it’s dismantled or not, it’s still money in your pocket.

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Jackie Veling writes for NerdWallet. Email: [email protected]

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