Buy now, pay later: How to overspend in the holiday moment

An ivory sequin minidress might be a holiday showstopper. But its $230 price tag will no doubt leave many shoppers shivering on the sidelines. Who can afford to spend all that money on a dress that you might wear, if you're lucky, twice?

An increasingly popular — but potentially risky — payment plan is enabling shoppers to rationalize a definite "No way" into a "Well, maybe just this once." The Anthropologie dress can hang in your closet for four installments of $57.50 over six weeks. Yes, $230 divided by four — no interest.

A slew of luxury goods and everyday go-tos can suddenly look more affordable this holiday season as retailers highlight an assortment of "buy now, pay later" options. In many cases, one big purchase can be split into four digestible payments. No interest, no fees — as long as you pay on time.

A long list of popular names — including Amazon, Nordstrom, Sunglass Hut, Free People, Target, Walmart and Old Navy — offer ways to buy now but pay over time.

The Klarna app can be downloaded, for example, to split the cost of your purchase into four smaller interest-free payments, paid every two weeks, to buy items at Walmart, Calvin Klein, Coach, Tommy Hilfiger and others.

The other major buy now, pay later lenders are Afterpay, Affirm, Sezzle, PayPal and Zip.

The installment option has been available for several years for online purchases but is being heavily promoted for in-store shopping this holiday season. Just download the app. "Shop Cyber Week now, pay later," says the banner ad for the Zip app on the lender's website.

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We're looking at a rapidly growing installment plan industry where the volume of buy now, pay later loans has soared from $2 billion in 2019 to $24.2 billion in 2021.

One good thing: By making fixed payments over six weeks, you're not building up debt by letting interest grow. The payment plans in some cases can be better than opening a credit card in the store and looking at annual interest rates of around 30% now.

As the Federal Reserve keeps pushing interest rates higher to fight inflation, more consumers could be tempted by any offer that claims to be interest-free or 0%.

Even so, consumers do not always end up with a low-cost, hassle-free experience.

The problem: Consumers can underestimate the risks and potential costs of these little-money-down options. Many consumers spend more if they have easier access to credit when they're shopping for jeans, shoes, electronics and yes, even eye-grabbing holiday dresses.

There's a growing concern that younger, lower-income and less financially sophisticated consumers risk taking on more loans that they cannot afford for higher-costs goods that they can do without.

Key strategies: Consumers must watch exactly what they buy, avoid spending on items that they really cannot afford, and dig deep to discover some hidden fees.

Using a buy now, pay later option isn't exactly like using a credit card. The lending standards aren't the same, so you could take on more debt than you can manage.

What if the dress isn't quite right?

What happens if you buy someone the wrong gift? Or say you have buyer's remorse and you realize that even at $57.50 a pop, a $230 dress is way out of your budget?

The Center for Responsible Lending studied complaints made by consumers to the Consumer Financial Protection Bureau and the Better Business Bureau regarding buy now, pay later options. Based on those complaints, 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.

"They get into this endless cycle, a loop of communication that goes nowhere," said Nadine Chabrier, senior policy counsel working on federal policy and litigation at the Center for Responsible Lending.

Nadine Chabrier, senior policy counsel working on federal policy and litigation at the Center for Responsible Lending, warns of the potential risks involved with "Buy Now, Pay Later" installment plans.
Nadine Chabrier, senior policy counsel working on federal policy and litigation at the Center for Responsible Lending, warns of the potential risks involved with "Buy Now, Pay Later" installment plans.

While the refund process might work for many, consumer watchdogs warn that much depends on how the situation is handled. Policies vary and getting a refund can be complex.

Typically, the consumer has agreed to pay automatically every two weeks, most often through their debit card. When a consumer has a dispute or returns a product, the consumer might have to work with both the lender and the retailer to get a situation resolved. In some cases, the consumer must contact the merchant first or exclusively, according to the Consumer Financial Protection Bureau, which is aggressively examining the impact on consumers.

Some consumers complained, Chabrier said, of not being able to stop their automatic payments when they didn't get the product if they ordered online or if they returned the product.

"Many buy now, pay later lenders are not offering the same clear set of dispute protections that credit card issuers have long been required to offer, which is creating chaos for some consumers when they return their merchandise or encounter other difficulties," Rohit Chopra, director of the Consumer Financial Protection Bureau, said in a statement in September.

The Consumer Financial Protection Bureau warns that shoppers who use buy now, pay later installment plans lack standard protections found elsewhere in the financial marketplace. "These include a lack of standardized cost-of-credit disclosures, minimal dispute resolution rights, a forced opt-in to autopay, and companies that assess multiple late fees on the same missed payment," according to an alert by the watchdog agency.

The Consumer Financial Protection Bureau is expected to issue more rules in the future, and consumer advocates want tougher standards to be more in-line with what's in place for credit card issuers.

Will you spend more than you can afford?

Holiday shoppers are always at risk of getting caught up in the moment of big sales, nostalgic emotions and new gadgets and goodies being sold at every turn. Easy payment plans can quickly get out of hand — whether they're pushed via infomercials or trendy apps.

Getting what you want is relatively easy. About 73% of applicants were approved for this type of credit in 2021, up from 69% in 2020, according to research by the Consumer Financial Protection Bureau. The lender's approval is quick and includes examining, among other issues, the consumer's prior repayment history with that lender.

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The average purchase is relatively small at around $135. But loans range from $50 to $1,000 and can be available for far more than clothes. In some cases, loans can even be used to buy groceries. Zip, for example, allows you to pay for groceries in four installments at Walmart. It can also be used at DoorDash and Hello Fresh.

Retailers are using these payment platforms to encourage browsers to become buyers. But as more retailers offer the option, the temptation to buy builds for those who cannot really afford an item.

Taking out several loans and seeing an extra $60 here, an extra $50 there and an extra $35 there being taken automatically out of your checking account could add up to a financial mess.

"The loans can make things look cheaper than they are," said Lauren Saunders, associate director for the National Consumer Law Center. She suggests using buy now, pay later options sparingly.

The best bet, of course, remains to buy what you can afford. For some, that means using a debit card to manage their money. Using a credit card, though, can offer more consumer protections. But you want to pay off credit card debt quickly.

Overextension is a real concern.

"Because most buy now, pay later lenders do not currently furnish data to the major credit reporting companies, both buy now, pay later and other lenders are unaware of the borrower’s current liabilities when making a decision to originate new loans," according to the Consumer Financial Protection Bureau.

What are the hidden fees?

Shoppers often pay 25% of the purchase price upfront when they take on many buy now, pay later plans. Then, the consumer makes three similar payments every two weeks to pay off the bill.

You can pay later — but watch out if you end up being late on your payments.

Late fees can be around $7 or $10. About 10.5% of borrowers were charged at least one late fee in 2021, according to the Consumer Financial Protection Bureau's research.

Klarna, for example, notes that a late fee of up to $7 may be charged if any scheduled payment remains unpaid after 10 days.

And you might then trigger overdraft fees associated with your bank account, if your account is short when that automatic payment is made.

If you keep missing payments, the lender could freeze your account to stop further purchases, according to the Consumer Financial Protection Bureau. And you could end up dealing with a debt collector at some point.

Shoppers this holiday season will find plenty of opportunities to buy items now but pay later through various financial technology services. The Klarna sign talks about using the buy now, pay now options in stores, such as Coach and Calvin Klein, at the Chicago Premium Outlets outdoor mall in Aurora, Illinois, on Oct. 3, 2022.
Shoppers this holiday season will find plenty of opportunities to buy items now but pay later through various financial technology services. The Klarna sign talks about using the buy now, pay now options in stores, such as Coach and Calvin Klein, at the Chicago Premium Outlets outdoor mall in Aurora, Illinois, on Oct. 3, 2022.

And then there's the marketing onslaught

The data that these lenders capture about you can be used to trigger more spending and drive future purchases, Chabrier said in a phone interview with the Free Press.

"The same app that you go into to remind yourself of when your payment is (due) tries to sell you more items," Chabrier said.

"It is an intense form of marketing just because there's a lot of data now being collected about you and used to drive purchases," she said.

Many times, Chabrier said, everyday consumers don't know how much information is being harvested about them, including their location and perhaps searches that they've done on other products online months earlier.

The buy now, pay later lenders are shifting their business models toward proprietary apps, which are used to build a valuable digital profile of your shopping behavior and preferences, according to the Consumer Financial Protection Bureau.

Longer term, the watchdog agency noted, a few large tech platforms could end up owning the bulk of consumer data. The end result? The consumer could face fewer choices and less price competition.

Shop wisely and do not load up on too many loans that might turn out to be a bad bargain.

Contact Susan Tompor: stompor@freepress.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.

This article originally appeared on Detroit Free Press: Buy now, pay later: How to overspend in the holiday moment