What to Know About Retail Loans

Everyone loves a good deal when shopping online. However, every now and then, you’ll probably come across an item that’s just outside of your budget. In these situations, you have a few options. The first and often wisest is to save the link and return when the item is on sale, after you’ve budgeted for the item. The other option used to be just putting it on your credit card and dealing with it later. But now, it’s also common to see “buy now, pay later” options that allow you to buy the item and pay in installments. 

You may be thinking, “Wow, that sure sounds like a credit card” and you would be more or less correct. The major difference between credit cards and buy now, pay later systems is that you don’t get a card. Instead, you’re essentially taking out a loan from a servicer at the point of sale. Let’s say you’re on the fence about a $500 purchase from Walmart. Buy now, pay later means you have the option of spreading out that $500 with smaller payments of $125 over four months.

Unlike applying for a credit card, however, the companies offering point-of-sale loans won’t run a hard credit check on you. Nor do they charge interest. Most make their money by charging retailers a higher transaction fee than a credit card company. This also earns retailers extra cash. Why? Because being able to spread out payments allows shoppers to be able to purchase things they otherwise wouldn’t. Plus, the buy now, pay later method also makes it easier for people with low credit scores or low-limit credit cards to make purchases. 

Does it sound too good to be true? Is it too good to be true? Well, it largely depends on the shopper. For some people it’s just a convenient way to get something slightly over-budget. For others, it’s an easy way to fall into retail debt, same as with a credit card. A recent survey showed that more than half of these shoppers hold high balances on their existing credit limits when signing up for buy now, pay later programs. Additionally, though these companies don’t charge interest, they do most certainly charge late fees, often as high as $10. When you think about that in relation to the item you bought, that can end up being a significant expense. Finally, a late payment can also ding your credit score. Again, depending on your specific financial situation, this payment system can hurt more than it helps. 

Ultimately, you know your finances better than anyone else. Buy now, pay later is one alternative to using a credit card, but like any other payment method, it’s important to manage and use it responsibly. 

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