Rather than pay for their purchases upfront, they were opting to pay in monthly instalments stretching out as far as three years. Gannon had begun to offer a “buy now, pay later” option in November, using Klarna, a Swedish payment services firm. But usage doubled during the pandemic. Those customers also tended to spend more.
“People spend more money when they don’t have to pay it all upfront,” she said.
The pandemic has been a boon for instalment-payment companies. Customers who select this option during checkout are effectively taking out a small loan to finance their purchase, which they pay back over periods ranging from a few weeks to several years.
Even before Covid-19, a growing number of retailers were introducing “buy now, pay later” plans, from fast fashion to luxury. But demand has exploded during the lockdowns when consumers turned to online shopping in record numbers. Brands see instalment plans as a way to keep consumers spending in a bad economy. They hope instalment plans will bring in new customers and increase average order values.
Asos, Drunk Elephant, La Mer and American Eagle are among the brands that signed up with Afterpay during the pandemic. Sephora, The North Face and Adidas joined Klarna. Signet Jewelers and Oscar de la Renta are among the new clients of Affirm, a smaller, San Francisco-based start-up that is eyeing an initial public offering, according to the Wall Street Journal. Sydney-based Afterpay, the biggest of these firms, saw revenue more than double to $3.8 billion in the quarter ending June 30, compared with a year earlier.
Being able to spread purchases out over several weeks without interest might be extra comforting.
“During the quarantine period in 2020 more people may be watching their weekly budgets,” said Lucia Perdomo-Ruehlemann, chief marketing officer at skincare brand Drunk Elephant, which added Afterpay after receiving numerous requests from customers. “Being able to spread purchases out over several weeks without interest might be extra comforting.”
Most of these lenders were founded after the 2009 recession, and have yet to be tested by a weak economy, which will likely trigger a higher rate of missed payments and add to criticism that instalment plans encourage consumers to spend beyond their means.
And though it’s the lenders, not the retailers, that take on the financial risk, consumers may blame brands anyway when interest and late fees start piling up. Customers typically pay no interest on short-term loans, though annual percentage rates can top 20 percent depending on the borrower.
“There is a real fear and concern when you are giving up some control of the customer experience to a system that you don’t fully manage,” said Jake Makler, head of partnerships at Quantum Metric, which provides data and analytics to fashion brands like Lululemon and Neiman Marcus.
A Meteoric Rise
Instalment plans are only the latest way retailers have extended credit to their customers. Layaway, where customers would put purchases aside until they paid for them in full, became popular in America retail during the Great Depression but faded with the emergence of credit cards. Retailers issued store credit cards starting in the 1980s, but their popularity waned after the 2009 recession when more customers began missing payments.
For fashion, these companies solve an age-old problem: their best customers, young people, also tend to have the least spending power. Young shoppers saw their earning power crimped by the last recession, and are more likely to be saddled with debt from student loans. Many see instalment plans as less intimidating than credit cards. Some 23 percent of Millennials don’t have credit cards, according to TD Bank.
“These shopping loans are very appealing to Millennials and Gen Z, especially right now,” said Kimberly Palmer, a personal finance expert at consumer finance site NerdWallet. “A lot of young people don’t have credit cards, either because they have bad credit … or because they are making a choice to avoid debt.”
A lot of young people don’t have credit cards, either because they have bad credit or because they are making a choice to avoid debt.
These lenders target younger shoppers with marketing heavy on Millennial pink and partnerships with brands like Revolve and Kylie Cosmetics. Next week, Klarna will team up with the women’s magazine Cosmopolitan to host a virtual “Hauliday” shopping event.
In just a few years, buy now, pay later has gone from a niche offering to e-commerce table stakes. Personal loans in the US have doubled since 2014, topping $161 billion last year, according to consumer credit reporting agency TransUnion. David Sykes, head of Klarna in the US, said he expects buy now, pay later to “achieve Paypal-like levels of ubiquity within the near term.”
“Klarna’s long term ambition is to sit at the intersection of retail, banking, and payments,” he said.
Why Retailers Sign On
Instalment plans aren’t cheap for retailers, which typically pay 4 to 6 percent of each transaction, compared with 1 to 3 percent for Visa or Mastercard.
Some retailers say the service attracts new customers and convinces them to spend more.
“Today, you have to give lots of flexibility to shoppers, and this is one of the expectations,” said Carl Cunow, co-founder of luxury swimwear brand Onia. Cunow has personally financed purchases with Affirm and offers Klarna for Onia. “Everyone is also kind of watching what everyone else is doing, so you need to keep up.”
Today, you have to give lots of flexibility to shoppers, and this is one of the expectations.
Installment-plan providers also promote the brands they work with through their own payment apps as well as advertising campaigns. That’s proven a big draw, particularly for smaller brands. These firms also pitch themselves as helping with customer retention; Affirm says 67 percent of its shopping loans are made to repeat customers.
“We think of them as a marketing partner … they are reaching out to audiences for us that we probably don’t reach, or can’t afford to reach,” said Dan Clifford, chief marketing officer of Mansur Gavriel, which has used Afterpay and now uses Klarna.
Nothing Is Free
Direct-to-consumer jewellery brand Mejuri started using Klarna in November, but the company hasn’t seen a meaningful uptick in return customers, said President and Chief Operating Officer Majed Masad.
As the buy now, pay later industry has grown, it has also drawn criticism for pushing younger shoppers into debt. In the UK, Stella Creasy, a member of parliament, has called on regulators to investigate whether these services deceptively market themselves as risk-free to young and uneducated shoppers.
“Most customers don’t realise that borrowing money is never free,” said Palmer of NerdWallet. “And of course, brands don’t want to be associated with people taking on debt and getting into financial hardships.”
Brands don’t want to be associated with people taking on debt and getting into financial hardships.
Greg Fisher, Affirm’s chief marketing officer, said the company is invested in “helping people build their financial wellness,” which is why he said the company doesn’t charge late fees. Molnar of Afterpay said the company targets a more financially fluent consumer — the average Afterpay user is in their mid-30s — and added that its user’s loss rate was about 1 percent, “which is significantly lower than using credit products.”
Klarna’s Sykes said the company takes “being a responsible lender extraordinarily seriously,” and that the $150 average order value through the service is a “manageable amount.” Last year, Klarna debuted a campaign, “Mindful Money,” to promote responsible spending. Afterpay and Klarna shut off users’ accounts if they are late on payments so that customers cannot make additional purchases.
The industry isn’t immune to the effects of the pandemic, though.
It’s entirely possible that many consumers will end up defaulting on the shopping loans they are taking out now.
“Given the current economic instability and financial fragility of many Americans, it’s likely that an increasing number of Americans will struggle to pay their bills,” NerdWallet’s Palmer said. “It’s entirely possible that many consumers will end up defaulting on the shopping loans they are taking out now, which does mean these companies are taking on more of a risk.”
Small brands in particular also need to weigh the benefits of offering instalment plans against the expense.
“You have to be mindful of the costs because they do add up when you are running a small business,” said Cara Cara’s Gannon. “Your margins can be diminished in a minute.”
But for some brands, the benefits outweigh the costs, as these services fill a need. Clifford of Mansur Gavriel said the fees can be equivalent, or even sometimes less than acquiring customers via social media. Young consumers also want to keep shopping but might not have access to credit.
“This is a generation who has shifted the way we pay,” said Nick Molnar, co-founder and the US chief executive of Afterpay. “They want to be empowered to spend their money.”
3 credit habits that you need to break
Are you using your credit card responsibly? Or do you have a few bad habits? Take a look at three common bad habits that people have with their credit cards and the best ways to stop doing them.
Habit 1: Pushing the limits
The first bad credit habit is pushing your outstanding balance close to its limit. What’s wrong with that? The first problem is that you’re giving yourself a larger debt load to contend with every month — one that accumulates interest the longer that it sits. It could be very difficult to pay down, and it could even lead to you maxing out your card.
The second problem with this habit is that it leaves you vulnerable to emergencies. You’ve taken up the majority of your available credit, so you can’t depend on it for unexpected payments. What if you need to pay for an urgent repair and there’s not enough room on your card? What can you do?
To avoid that difficult situation, you could apply for an online loan to help you cover the emergency costs and move forward. See how you can apply for an online loan in Ohio when you have no other safety nets to fall back on. It’s important that you only turn to this solution when you’re dealing with an emergency. It’s not for everyday purchases or small budgeting mistakes.
In the meantime, you should try your best to keep your credit utilization at 30% or lower — this means that your balance should be below the halfway point of your limit.
Habit 2: Paying the minimum
You pay your credit card bills on time, but you only give the minimum payment. While this habit can stop you from racking up late fees and penalties, it can still get you into hot water if you’re not careful.
Only paying the minimum for your bill will make it very difficult for you to whittle down the balance, especially when you’re continuing to charge expenses on your card. You’re only taking $20-$25 off a growing pile.
So, what can you do? If you’re paying this amount by choice, stop it — you’re only making things harder for yourself down the line. If you’re paying this amount because you don’t have any more funds, look at your budget to see whether you can cut your monthly costs to get more savings and use them to tackle your balance.
Habit 3: Using it for every single expense
You don’t need to put every single expense on your credit card. Your morning coffee? Your afternoon snack? Putting these small, everyday expenses on your card is a habit that can make your balance climb quickly.
You also don’t want to put some very important expenses on there, like mortgage payments. For one, these payments are large and will take up a significant amount of your credit. Secondly, if you need to use a credit card to make these payments on time, you need to reinvestigate your budget to see whether you can actually afford your living space.
So, what you should you do? Use a debit card, cash or checks to pay for the items above. Only put expenses on your credit card that you’re positive you can pay off in a reasonable timeframe.
Don’t let these bad habits drag you down and get you into financial trouble. Break them now, before it’s too late.
Free credit reports have been extended; here’s why it’s important to check yours regularly
Typically, you’d be able to check your credit report — at least for free — just once annually through each of the three major credit reporting agencies. But thanks to the coronavirus pandemic, credit reports are now more accessible than ever.
Credit reporting companies Equifax, Experian and TransUnion are all offering free credit reports weekly through April 20, 2022.
The move means better insight into your financial health during what, for most, is an economically challenging time. According to experts, it might also be a time that’s ripe for at-risk personal information and identity theft, too — even more reason consumers should be checking their credit on the regular.
Have you checked your annual credit lately? If not, here’s what you need to know about these free nationwide credit reports and how to get them. If you’re not sure where you fit on the credit score spectrum, you may want to start using a credit monitoring service to track changes to your credit score. Credible can get you set up with a free service today.
Free credit reports for all?
The nation’s three credit bureaus initially started offering free weekly credit reporting last year, just after the pandemic began. In early March, they announced they’d extended the offer for another year, this time through April 20, 2022.
To request your free credit reports and access copies, you can go to AnnualCreditReport.com and provide some basic information to verify your identity (things like your date of birth, Social Security Number, and address).
Once your report is ready, you should see a detailed list of all open and closed accounts in your name, your payment history, recent credit activity and more.
Protect yourself from identity theft
There are many reasons why checking your credit activity is important, but chief among them? That’d be the prevalence of data breaches in today’s world — not to mention the risk of identity theft they come with.
“In the past, it was perfectly acceptable for people to check their credit history once a year, but now with security breaches happening on a regular basis, consumers should be monitoring their credit more closely than ever,” said Clint Lotz, president and founder of TrackStar.ai, a predictive credit technology firm.
Lotz said the Equifax breach — which exposed over 147 million Americans’ personal information in mid-July 2017 — is the perfect example of why watching your credit report is important as far as identity theft protection goes. The pandemic, he said, adds an extra layer of risk to things.
“It took them [Equifax] months before they even realized they had been hacked, and considering that they hold files on hundreds of millions of Americans, it’s fair to say that many identities were stolen by the time they caught up to it,” Lotz said. “With many of us worrying about very serious issues not related to our credit, it’s a prime time for that stolen data to be put to work by bad actors in slow, methodical ways and in the hopes that nobody notices it.”
More reasons to check your credit
Checking your credit health often isn’t just good for detecting fraud alerts and to protect your identity, though. You can also monitor your report for errors — things like inaccurately reported late payments, for example — and then dispute those with the credit bureau.
If the error gets corrected, it could improve your credit score and make a jump from bad credit to a FICO score that’s more favorable. Not sure of your credit score? Head to Credible to check your score without negatively impacting it.
You can also use your credit reports and scores to monitor your financial habits — like the timeliness of your payments or how much debt you have left to pay off. Both of these factors can play a big role in your score, as well as how likely you are to get approved for loans, credit cards and other items.
“If you’re taking out a loan, getting insurance or even applying for a new job, checking your credit will allow you to see an overview of what would be seen by others looking at your credit,” said Leslie Tayne, a debt relief attorney with the Tayne Law Group. “Staying up-to-date on your credit reports and information allows you to know exactly where you need to improve.”
Want to be sure your credit is stellar before applying for a loan or insurance policy? Consider Credible’s partner product Experian Boost, which lets you use positive payment history on utilities, streaming and other bills to improve your credit score.
Set up a monitoring service, too
Though checking your credit reports manually is smart, you should also consider signing up for a credit monitoring service. These consumer financial services check your credit information and score regularly and alert you of any changes.
If you’re interested in monitoring your credit or improving your score, head to Credible and learn more about how Experian can help. You can also use Experian Boost to get credit for on-time bill payments.
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
Do Personal Loans Have Penalty APRs?
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.
The Blue Cash Preferred® Card from American Express, for instance, has a 13.99% to 23.99% variable APR, but the penalty APR is a variable 29.99% (see rates and fees). Penalty APRs usually last for at least six months, but card issuers often reserve the right to extend them — especially when you continue making late payments. A look at the terms for the Citi® Double Cash Card show us that the “penalty APR may apply indefinitely.”
Penalty APRs are certainly not a trap you want to fall into, but it’s not something you usually have to worry about if you have a personal loan. Personal loan lenders can, however, charge late fees upwards of $39 per late payment. Whether your loan charges late fees all depends on how good of a loan you qualify for, and that comes down to your credit score, borrowing history and ability to make your payments.
Personal loans also tend to charge lower interest rates than credit cards, too. The average personal loan interest rate for two-year loans is currently 9.46% according to Q1 2021 data from the Federal Reserve, compared to 15.91% for credit cards.
Typically, interest rates for personal loans range between roughly 2.49% and 24%, but personal loans for applicants with bad credit can come with even higher APR — so do your research before applying.
Other common personal loan fees include:
- Interest: The monthly charge you pay to borrow money
- Origination fee: A one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs
- Late fee: A one-time fee charged for each payment that you fail to make by the due date or within your grace period
- Early payoff penalty: A fee incurred when you pay off your balance faster than planned (because the lender misses out on months of expected interest payments)
As you can see, personal loans can be costly, even without a penalty APR. It’s obviously best to avoid paying extra fees whenever possible. That’s easier to do when you have a good to excellent credit score, since you’ll qualify for better loan options.
None of the loans on our best personal loan list charge origination fees or early payoff penalties, but some may charge late fees.
Find the best personal loans
For rates and fees of the Blue Cash Preferred® Card from American Express, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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