If you’ve been shopping online lately, you’ve probably seen the option to pay in monthly installments through services such as Klarna, AfterPay, and Affirm. Usually there’s no credit check or interest, and no fees if you pay on time.
This system is good for those who don’t own a credit card and need to stretch out their payments, says Michelle Singletary, Washington Post personal finance columnist. She gives the example of a student trying to get a computer, but who doesn’t qualifyquality for credit and whose parents are cash-strapped, so it’s helpful that the student can pay incrementally through income from a part-time job.
But this is problematic for those who don’t have their spending under control. “Breaking it up into these little payments makes it seem more affordable. But when you add it all together, it's not. … [Companies] know people will buy more when they think, ‘Oh, it's only going to be $25 for four times?’”
She says merchants know that an online shopper may only have enough money for one pair of shoes, but if they’re allowed to pay it in four installments, they may think they can get three pairs of shoes instead, which means more sales for the company.
Meanwhile, legal action is happening around this. A district court in Northern California filed a suit against Paypal over its “Pay in 4” installment plan, and other states have filed class-action lawsuits against Klarna and Affirm. Singletary says the suits generally argue that companies are not disclosing potential fees from banks — such as overdraft fees when you don’t have enough funds to make monthly payments.
She adds that some consumers say they’re still being charged for items they’ve returned, and there’s dispute over who’s supposed to make sure that doesn’t happen (the buy-now-pay-later companies or the merchant selling the goods).
Singletary’s advice: Save up enough money to pay for items in full.
You could also add merchandise to your online shopping cart and leave them there for a while, rather than check out immediately. That’s to see if you really want them.
Singletary reminds people to be particularly careful because the world is still emerging from the coronavirus pandemic — people may have returned to work, but they’ve lost income and are trying to catch up. Plus, inflation is at a 40-year high. So with the higher cost of essentials like food and gasoline to get to work, be more thoughtful about optional/discretionary spending.
“Just really think about whether or not you need it because you might need that money down the road for something else. There’s all kinds of things that could happen.”