Should you use Afterpay to pay in installments?
Update (Nov 2022): After doing more research on “Buy now, pay later” services, we’re inclined to say they’re simply a bad idea.
You’ve probably seen it hovering somewhere on the checkout page when you shop online. “Buy now, pay later in 4 easy installments.” Is it ok, or too good to be true? What’s the difference between using one of these services and paying with a credit card?
A little bit about loans and financing
What these services and apps offer is basically a short-term mini loan. For example, if you buy a couch that’s $800, this service gives $800 to the store where you’re shopping. Then you pay the service back in installments. Say, 4 payments of $200 each, every 2 weeks.
Loans make sense for large purchases, especially if they bring more value over time. Real estate is usually a good investment because you can get a loan on a house (mortgage) and eventually sell that house for more than you paid for it. So you get a place to live and extra $$ as part of one package. Yep, this is why people buy houses!
Student loans also make sense, because they enable you to get an education that will lead to higher income over the course of your life. That’s the idea. For houses and education, this is worth it even when you include the cost of the interest paid on the loan, as long as the interest rate is within a low/normal range. That’s considered about 5% or less.
So should I get a loan for a couch?
This is where you really need to pay attention to the details. With services like Afterpay, Affirm, Klarna, and Apple Pay Later, you get approved (hopefully) for a mini loan very quickly, right at checkout. The good news is this is a “soft” credit check and shouldn’t impact your credit score. The bad news is that paying it back also won’t impact your credit score. (You don’t get credit for doing what you’re supposed to do here.)
Don’t pay interest on a couch
Sometimes these services are available without interest. So READ the details and know what you’re getting into. Even if you take really good care of a couch, you’re not going to sell it for more than you paid for it. So there’s no reason to pay even more by adding interest. If you end up spending $900 in the end, you haven’t bought more couch. You just got burned for an extra $100.
Buy furniture, not fees
Another reason to read the fine print is that some services charge late fees if you don’t make the payments on time. Even if you forget, and the fee is small, that’s not money you need to be spending. Again, you get no more couch, just less money.
Mini loans vs. credit cards
It’s easy to get into trouble with credit cards. But if you use them responsibly, they’re not necessarily bad. Compared to mini loans, they actually allow you to earn rewards and build credit. And if you want to buy that house someday, building credit now is a good start.
So mini loans aren’t terrible if you’re not paying extra in interest or late fees. They can be helpful if you don’t have much credit or your credit card needs a break. But they lack some of the benefits credit cards actually do have.
No matter how you’re going to buy that couch, make sure you can actually afford to spend $800 first. And don’t let anyone make you pay a penny more!
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When I was researching this article, I shopped for some big-ticket items online. I had to add them to my cart before I could access the detailed terms of the mini loan. This is great for the store, because now they’ve gotten me halfway committed to buying. And in one company’s study, I might be 44% more likely to complete the purchase if I can pay with a mini loan. But I am not buying this Nike Apple Watch! Because I hate being a statistic.