As “buy now, pay later” apps become more popular, proceed with caution

Retailers are making shopping easier than ever with Buy Now, Pay Later loans.

Also known as point-of-sale installment loans, this is a type of short-term financing that allows you to split your purchases into monthly installments. The services that offer them, such as Affirm, Klarna, Afterpay and Quadpay, are becoming increasingly popular as consumers seek to spread payments over large acquisitions, without using a credit card.

“Buy now, pay later” in the US grew 215% year-over-year in the first two months of 2021, according to an Adobe analysis. Lenders are partnering with retailers like Macy’s, Walmart and Peloton to offer their services.

However, before signing up, proceed with caution. While you may be tempted by a low or zero percent interest rate and an easy application process, be sure to read the fine print.

“It’s important to take the time to understand at least the most important details of what you are applying for before you apply,” said Matt Schulz, chief industry analyst at LendingTree.

“What you don’t know can end up costing you money.”

Here’s what to look for before committing.

Buy now, pay later loans have interest rates similar to retail credit cards, which means the APR could be as high as 30%. However, some do offer promotional interest free installments.

“If you pay off your balance on time, according to the installment plan, then these things can be really, really cheap and essentially interest-free,” Schulz said.

“When you don’t pay on time or make some other mistake, this is when things can get a bit risky.”

You may no longer have an interest-free loan and may be charged late fees.

There are also those who are looking for the “buy now, pay later” options because they will not qualify for a credit card, due to bad credit or lack of credit. Typically, “buy now, pay later” lenders have less stringent credit checks, said Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling.

“If you are in this situation, the entrance ticket can be expensive,” he said. “There may be fees or higher interest rates that you will face as a result.”

Typically, you pay your credit card bill once a month. With a “buy now, pay later” loan, you can have a bill every two weeks, Schulz said.

The unusual cadence could make it easy to forget to pay, which can lead to late fees.

Some “buy now, pay later” lenders do not report your payments on time to credit reporting companies.

“It’s easy to step in the door, but walking in the door doesn’t mean you’re helping build a credit history,” McClary said.

However, they will notify the credit reporting companies if you have missed a payment.

If your intention is to create credit, make sure you understand how the lender handles it.