Nearly everywhere you shop for the holidays you're bound to spot a way to "buy now, pay later." We're not just talking furniture. Want anything from sneakers to a Sony PlayStation 5 Slim Console to airline tickets? Well, there's a way to get them now and pay by installment.
But the increasingly popular payment plan is wrapped in potential risks especially for some financially fragile consumers – complex rules, higher-than-expected interest rates in some cases, late fees and more.
The big draw is the chance to buy something now, maybe something even something small like a $50 sweater or a one-time splurge on designer shoes – interest-free. It's not always a necessity, like new tires, though some shops offer "buy now, pay over time" plans with annual percentage rates that could be as high as 36%.
For some consumers, these installment loans can work, if you don't load up on a string of them, carefully understand all the terms, play by the rules and pay off the entire bill on time.
Unfortunately, the consumer who is most likely to turn to "buy now, pay later" plans already has far less of a cash cushion and faces many other financial challenges, according to research by the Federal Reserve Bank of Boston.
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Some 71% of consumers who took out "buy now, pay later" payment plans already had built up some credit card debt in 2023. That compares with 40% of credit card holders who didn't use a "buy now, pay later" plan, according to a Fed survey.
And we're talking about taking on more debt here.
If you're considering a "buy now, pay later" offer, here's what you need to know.
Why would you want a 'buy now, pay later' offer?
Are you tempted because, perhaps, you're considering buying something you really cannot afford right now? Should you delay buying the item until you have more money?
The "buy now, pay later" concept could be a great service for consumers who are getting paid soon, maybe they'll be receiving a big check or even a tax refund shortly, said Joanna Stavins, senior economist and policy adviser in the Federal Reserve Bank of Boston.
Paying over four installments might be a way to handle a temporary short-term loan, she said.
But not everyone has a large chunk of money that is heading their way soon. Many people are what economists call "liquidity constrained" and dealing with more long-term shortfalls in cash flow.
"What happens if they don't have enough money in two weeks or four weeks to repay those loans," asked Stavins, whose research focuses on how and why consumers pay the way they do.
"Getting short-term credit might not necessarily help them," she said. "In the sense, that they'll just pile up one debt on top of another."
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How much can such a deal cost you?
Too often, Stavins said, the consumer might just think "Why not?" when offered a chance to split a purchase into multiple payments at checkout online or in the store.
Unfortunately, she said, "buy now, pay later" offers tend to be far less transparent about potential costs than the uniform chart that you can find to spell out the terms and conditions for credit cards.
"It's buried somewhere in the fine print," she said.
The offers themselves can vary widely, so you cannot assume that the terms for one offer at one store is the same as what might seem to be similar offer at another store. You'd want to carefully read specific terms online. Some offers involve paying in four interest-free installments paid automatically every two weeks, but others extend over more time.
Klarna, for example, notes online that the first payment is charged when you checkout to buy the item. The next three payments, if you're paying in four installments, are scheduled every two weeks after that.
If you fail to make a payment, Klarna says a late fee of up to $7 may be charged if any scheduled payment remains unpaid after 10 days. The total of late fees charged on an order will never exceed 25% of your total purchase amount.
Another key point: You could get stuck paying interest or fees charged by your financial institution, say if you use a credit card – and do not pay off the bill in full every month – to cover the automatic installment payments.
Or you might face big overdraft fees if you've tied payments to a debit card through your bank if enough money isn't available in your account to cover the payment.
Should you use a 'buy now, pay later' plan to buy gifts?
No doubt, the chance to break up a payment into four or more installments will offer a consumer more flexibility. But consumers who don't have much cash on hand could run into trouble when another bill or emergency hits.
Bottom line: Holiday shoppers – who aren't really buying necessities – should take their overall financial picture into account before being tempted by installment plans.
"Don't spend more than you have in the bank," Stavins said. "I don't think borrowing on a credit card is a financially prudent thing to do."
Many times, she said, consumers might need to borrow to cover a health emergency or other unexpected essential costs.
In her view, though, consumers shouldn't put extra debt on a credit card to pay for holiday gifts. The same's true, she said, for using "buy now, pay later" to deal with your gift list.
"I know it sounds very corny and old fashioned," she said. "If you can't afford it, buy something cheaper. It's all about the gesture."
The installment plans of one variety or other are everywhere – the Gap, Chico's, Macy's, Walmart, Target, Best Buy and more.
And some credit card issuers offer "buy now, pay later" options too.
Typically, you'd go to the banking app to determine if the item, maybe something that's priced at more than $75 or $100, is eligible for an installment loan. You might face a fixed fee or other costs, depending on the program. Sometimes the plan fee, if expressed as an annual percentage rate, often runs something like 8% compared with 20% on average for a traditional credit card transaction, said Ted Rossman, senior industry analyst for Bankrate.com.
"So that's the appeal for consumers," Rossman said.
Can you really afford an installment plan?
The temptation could be the greatest for those who can least afford it. Many people who use "buy now, pay later" options are already financially fragile, according to researchers.
Consumers who used "buy now, pay later" plans, according to the latest Fed research, indicated that they have $2,179 in their checking accounts, far less money than other consumers who have on average $6,638.
Those using "buy now, pay later" plans aren't typically high income consumers, according to the Fed report issued in May. Instead, many earn between $50,000 to $75,000 a year.
Women, Black and Latino consumers, according to the report, also are significantly more likely to turn to a "buy now, pay later" plan than other consumers. That's true, the Fed research stated, even when differences in income, employment status, and educational attainment are taken into account.
The programs are also more popular with those who have low credit scores and might not be able to qualify for low-rate credit card offers.
The Federal Reserve has been conducting its detailed Survey and Diary of Consumer Payment Choice since 2015 – and included questions to consumers about "buy now, pay later" plans in 2021, 2022 and 2023.
From 2021 through 2023, the latest report noted, consumers became gradually more aware of "buy now, pay later." The report indicated that 9.3% of consumers in October 2023 had used the payment plans, up from 6.6% in 2021.
In 2023, more than half of the respondents were offered a "buy now, pay later" payment plan in the 30-day period leading up to when they took the survey, compared with nearly one-third in 2021.
Can you return an item if you bought it on a payment plan?
Two years ago, I warned that some consumers complained they had trouble returning items and getting refunds when they bought items through "buy now, pay later" plans.
At that time, the Center for Responsible Lending had studied complaints made by consumers to the Consumer Financial Protection Bureau and the Better Business Bureau. Some consumers said they had faced delays in receiving refunds, had difficulty resolving disputes and were upset when they still had to make repayments during a dispute process.
In May, the Consumer Financial Protection Bureau issued a new rule to take effect July 30, based on its interpretation of federal consumer financial law, which would require the payment platforms to provide key protections offered by regular credit cards, such as the right to dispute charges and ask for refunds if they return the product.
“Regardless of whether a shopper swipes a credit card or uses 'buy now, pay later,' they are entitled to important consumer protections under longstanding laws and regulations already on the books," said CFPB Director Rohit Chopra in a statement.
The CFPB said more than 13% of "buy now, pay later" transactions involved a dispute or return.
As part of this ruling, the CFPB said, "buy now, pay later" lenders also must provide periodic billing statements like the ones received for classic credit card accounts and meet other requirements under the Truth in Lending Act.
An industry trade group called the Financial Technology Association filed suit against the consumer watchdog agency in October, maintaining the federal agency is imposing rules that are a poor fit for the "buy now, pay later" loans and overstretched its authority in doing so.
For shoppers, it's important to understand some consumers using "buy now, pay later" platforms in the past complained of extra hurdles to get refunds. It's also essential to review the merchant's return policy about whether a product can be returned for a refund when you're shopping at a given spot.
Will you be able to repay your 'buy now, pay later' loan?
Nadine Chabrier, senior policy and litigation counsel at the Center for Responsible Lending, said unlike traditional credit cards, "buy now, pay later" companies aren’t required to check if borrowers can afford to repay their loans or required to make sure that the amount being charged for late fees is fair.
"Without these additional protections, there’s a risk that borrowers, especially low-income borrowers, could fall in a cycle of debt," Chabrier said.
The Consumer Financial Protection Bureau notes in its fact sheet that some "buy now, pay later" products may include interest or finance charges – however characterized or labeled, such as origination fees.
Chabrier noted that some shoppers on a tight budget face even more risk if they take on multiple "buy now, pay later" plans to buy several gifts during their holiday shopping and then end up trying to manage multiple repayments and differing due dates.
"While these products can seem appealing at first," she said, "they’re risky for shoppers if the required future payments aren’t carefully managed."
For some people, a "buy now, pay later" plan might be better than just making a small minimum credit card payment each month, and running up your debt quickly, said Rossman, of Bankrate.com.
But he stressed it's really important to understand the wide range of offers. Major "buy now, pay later" players, including Affirm and Klarna, now have physical payment cards that make it even easier to sign up for these type of installment plans, Rossman noted.
"And it's not always four interest-free payments over six weeks anymore," he said. "Many of these plans are lasting longer – six months, 12 months, sometimes even more – and charging interest rates that can approach or even exceed what a credit card would charge.
"We see comically large ranges, like 0% to 36% APR. Well, which is it? There's a huge difference."
Much will depend on the provider, your credit profile, the merchant, the length of the term, and dollar value of the purchase, he said.
Make sure that you understand from the start how much interest you’ll pay, if any.
"Don't get tricked into thinking it's not a $200 purchase anymore if it's just four easy payments of $50," Rossman said.
Contactpersonal finance columnist Susan Tompor:stompor@freepress.com.Follow her on X (Twitter)@tompor.
