If you do much of your shopping online, you’ve probably come across a “buy now, pay later” option when checking out. While this used to be uncommon, it has exploded in popularity over the last several years. In banking industry speak, this is known as “point of sale financing” — where a customer is applying for some type of credit at the time of purchase. This is most common online, but you’ll see it occasionally in-store.
Think of this “check out loan” as the updated equivalent of getting a store credit card, but instead of being an open ended line of credit, it is more like a personal loan with a set term.
How does “buy now, pay later” work?
The process of using a check out loan is straightforward. You’re most likely to encounter one of them as a payment option at online retailers offering more expensive goods, like home furnishings, durable fitness equipment, travel, and higher-end fashion.
If you select a buy now, pay later lender at check out, you’ll be redirected to the lender’s application. The check out loan application is typically brief, and will ask for your name, address, phone number, email, date of birth, and at least the last four digits of your social security number. In some cases, the lender may request additional documentation of your identity, income, or employment.
Upon submitting your application, you’ll typically receive an instant decision on the terms you qualify for. You’ll be able to review the check out loan amount, interest rate, and repayment period you’ve qualified for. Loan lengths are shorter than for personal loans, and are typically from 3-12 months.
- Need a longer repayment timeframe? Check out our personal loans guide for 2020.
Once you’ve chosen your buy now, pay later terms and completed your loan agreement, you’ll be returned to the merchant to complete your transaction.
Who Offers Checkout Loans?
There are a number of lenders that offer “buy now, pay later”-type loans. The most popular are Affirm, Klarna, Afterpay, and Bread. Even Goldman Sachs, via its Marcus brand, recently began offering a point of sale loan through its partnership with JetBlue.
While it’s possible to shop directly through some of these lenders’ sites/apps, you’re most likely to encounter one of these lenders as a financing option at a retail partner. “Buy now, pay later” financing options are popular with direct to consumer upstart merchants like Casper, Peloton, Wayfair, and Brooklinen, though some retail stores like Sephora and The North Face also offer these options.
Pros and Cons of “Buy now, pay later”
- Quick application & approval process
- No or low fees
- Soft credit check to qualify (loan & payments will show on credit report)
- Can qualify with limited credit history
- Rates comparable or higher than credit cards (up to 30%)
- Accepted only at selected retailers
- Typically smaller loan amounts
Should I Use a “Buy now, pay later” option?
While we can’t give you informed advice without knowing your complete financial circumstances, we can give general guidance about using a loan at checkout.
Who it’s good for: if you’re new to credit and need financing for a larger purchase.
Key benefits: spread payments over time. Some point of sale loans offer free 30 day financing or to split your payment into 4 installments, interest free.
What to watch out for: because these loans are presented at checkout, they encourage impulse purchases and taking on debt without considering the implications. Before applying for a check out loan, make sure it fits in your budget.
When to avoid it: if you were planning on paying for a purchase in full, but then see the option to “buy now, pay later”, avoid the temptation to take on more debt.
Alternatives to check out loans: if you need to finance a larger purchase, check the APR on any credit cards you may have, as they may be lower. It’s also worth checking what rate you qualify for on a personal loan, as this may be a cheaper option.
Have a personal finance question?
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photo: Blake Wisz via Unsplash