The pros and cons of installment apps


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If you’re one of those people who frequently shop online for family needs, it’s probably no news that Buy Now, Pay Later (BNPL) options are becoming more common at the checkout. Names like Klarna, Affirm, Sezzle, and Afterpay, unfamiliar to many just two years ago, are popping up on almost every ecommerce site these days.

BNPL companies that offer short-term financing (sometimes referred to as point-of-sale installment loans) allow consumers to make purchases and pay for them at a later date. In many cases, the financing is even offered without interest. All of this can be very tempting when your family is on a tight budget or you’re short on cash for a major need.

But not so fast. While “buy now, pay later” can seem like a wonderful solution in an emergency, this approach to making everyday purchases can also have its downsides on your family budget. Here’s a closer look at how these apps work — and what to avoid.

What are installment apps?

“Buy now, pay later” is a form of financing that has only become widespread in recent years. Forbes reported that BNPL usage among Gen Z increased six-fold from 6 percent to 35 percent between 2019 and 2021. Millennials are also taking advantage of these emerging payment options — their usage doubled to 41 percent over the same two-year study period.

This growing popularity has seen consumers make nearly $100 billion in retail purchases using BNPL options in 2021, a huge jump from just $24 billion in 2020.

But what exactly are installment apps?

“Buy now, pay later is a form of financing that allows consumers to split the cost of a purchase into installments,” said Mike Rittler, head of retail card services at TD Bank.

Typically, BNPL apps allow consumers to make four equal payments over a period of weeks or months, although different providers have different repayment terms, Rittller adds. Additionally, these apps typically have low interest rates or do not charge interest at all if consumers make on-time payments.

Does using installment apps affect credit scores?

So far, the “buy now, pay later” approach to shopping appears to have had very little impact on consumer creditworthiness — either positive or negative, say industry analysts.

“A lot of people are drawn to ‘buy now, pay later’ because these lenders are typically less picky about credit quality,” said Ted Rossman, senior industry analyst at Bankrate. “But to date, most buy-now-pay-later plans don’t help you build credit either.

One exception to this rule, Rossman says, is Affirm, which reports to Experian on some of its longer-term payback plans. However, the landscape will change when it comes to the lack of credit implications – or benefits – of using BNPL.

“Credit reporting will be much more pervasive in the buy now, pay later space as Equifax announced plans to add a much broader range of buy now, pay later plans to its credit reporting this quarter,” Rossman continued . “It is still unclear exactly how this will work. For example, the industry needs to figure out how to deal with things like credit utilization and account aging. If these nuances are not properly addressed, there could be unintended consequences for consumers.”

Are Installment Payment Apps Safe?

For the most part, BNPL apps are very secure in terms of protecting your family’s financial information and other personal information and details. But that doesn’t mean that this form of payment went smoothly.

“There have been some complaints about returns and other disputes,” explains Rossman. “For example, sometimes people return an item, but the ‘buy now, pay later’ company still wants their cut. This can get confusing when there is a middleman involved.”

The biggest risk of “buy now, pay later”? It’s more likely to simply be overspent — either through a lack of financial discipline on the consumer’s part or a lack of underwriting on the lender’s part. The Consumer Financial Protection Bureau recently announced that it is taking a closer look at these potentially worrisome issues, Rossman says.

How can BNPL apps help families make ends meet?

For families on a tight budget, BNPL can be an attractive solution — one that doesn’t incur interest or requires excellent credit.

“Buy now, pay later” companies give people the opportunity to finance a purchase that they may not be able to pay off immediately, but potentially at a lower interest rate and for a shorter term than a credit card,” explains Rossman. Or at least you know exactly how much you owe for exactly how long. That predictability and light at the end of the tunnel is key.”

This type of financing, once aimed primarily at young consumers who didn’t have a lot of spare cash or a solid credit history, has now expanded to attract a more diverse group of buyers, including those who are more affluent and “Buy Now,” pay later” to make expensive purchases.

“They use ‘buy now, pay later’ on things like Peloton bikes and they might pay about $50 a month for up to 43 months with no interest from Affirm,” explains Rossman.

At the same time, the BNPL area has grown, attracting more and more family shoppers, many of whom are splitting the cost of items needed for children or significant living expenses.

“‘Buy now, pay later’ can help families deal with large, one-off expenses,” says Annie Millerbernd, personal loan expert at NerdWallet. “It works best when you’re using it for a large purchase, when splitting up the expenses would take some pressure off your budget.” When it comes time to buy new school clothes or planning a family camping trip, breaking a big shopping spree into smaller, interest-free payments can make it much more manageable.”

However, it’s important that buyers — families or otherwise — evaluate each purchase and each payment plan as part of their overall budget and not in a vacuum, adds TD Bank’s Rittler. If these loans are not managed properly, these loans can easily add up and soon your family budget is completely out of balance or you are overwhelmed.

“For example, a shopper may decide they can afford to pay $100 every two weeks to purchase an item they want,” says Rittler. “But if they make that assumption three times on a shopping spree, they’re now looking at $300 bi-weekly, which could take $600 off their monthly budget.”

What are the general pros and cons of installment payment apps?

As mentioned by the financial experts in this article, the most significant potential downside to using BNPL is that it can easily encourage spending well beyond your family budget.

Other downsides include a lack of strong buyer protection for things like returns, dispute resolution, buyer protection, and extended warranties, Rossman says. “Credit cards are superior in this regard, plus credit cards have much more attractive rewards programs,” notes Rossman. “Most ‘buy now, pay later’ plans don’t offer any rewards.”

The biggest benefits of using BNPL are the ability to spread purchases over a predictable payback cycle and be able to buy what you need right away. And if your credit isn’t ideal, BNPL offers lenient lending standards than most credit cards.


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