Consider it layaway with benefits.
If you remember layaway plans (ask your parents!), you know it’s an old retail custom in which you make installment payments over a period of time to buy a product or service you can’t afford upfront.
But the new generation of buy-now-pay-later services like Afterpay has upped the ante by letting you keep the merchandise immediately after you make the first payment. You pay off the balance in three equal installments, but there’s no more waiting until you hand over that last dollar to get your hands on your purchase.
If you feel like you’re seeing more of these offers in your favorite store or online, you’re not imagining things (and you probably shop at retailers that cater to a younger demo).
Australia-based Afterpay announced that it’s signed up more than 13 million U.S. customers as of January 2021 and trumpeted a list of 64,000-plus global retail partners that include Anthropologie, Crocs, Fabletics and Ulta Beauty.
Americans continue to pull back on and pay down credit cards — balances fell $76 billion in the second quarter of 2020, the steepest decline in card balances since the Federal Reserve started keeping data in 1999. The idea of using a service that allows monthly payments sans the accruing interest could be appealing.
Choosing installment payments is as simple as a credit card or PayPal option at checkout, but is it worth trying? We’re here to explain how the service works — and when it might be a good idea for you to use it.
What Is Afterpay?
Buy-now-pay-later services like Afterpay are also known as point-of-sale lenders. They tout the benefits of using their service instead of a credit card, noting that users don’t pay fees or interest on their purchase.
That’s true, but changing the method shouldn’t change how you perceive the purchase, according to Ariel Ward, Certified Financial Planner at Abacus Wealth Partners.
You must use a credit or debit card as your method of payment on Afterpay — prepaid cards are not eligible.
“You can pay for [the purchase] in small chunks so it doesn’t feel as bad,” she said. “But just like a credit card, you’re likely going to spend more than you normally would.
“Even though it’s billed as a way that it’s going to be helpful to the consumer — because you don’t have to pay for this item in one big chunk — it’s a really a way that companies can make more money off you.”
How Afterpay Works
Afterpay and other installment payment services aren’t lines of credit, so you don’t need the hard credit check like you would with a credit card — but you also don’t get the benefit of adding on-time payments to your credit history.
Afterpay works like this:
- Set up an Afterpay account either online or via the app. You’ll provide basic information like your name, birthday and address. You’ll also need to add at least one credit or debit card to use as your payment option.
- When you make a purchase, choose the Afterpay feature during checkout. You’ll receive notification about your approval in a few seconds (if you have overdue payments, you won’t be able to make a purchase).
- If you’re buying in a brick-and-mortar, you’ll be billed for the first 25% of your purchase immediately and take the purchase home with you. If you’re buying online, your items will ship when the first payment is processed.
- The other three equal payments are due every two weeks. You have the option to make payments manually before the due date, send the payment on the due date or set up automatic payment, allowing Afterpay to take the installment from the payment method you have on file. Afterpay will send you a reminder before the payment is due, regardless of which method you choose.
- If you make multiple purchases, you can track when different payments are due through the Afterpay account dashboard.
- If your payment isn’t successfully processed within 10 days of the due date, you’ll get charged a late fee of up to $8 (or up to 25% of the purchase price — whichever is less). You’ll be charged a late fee each time you miss an installment payment.
The maximum amount you can spend using Afterpay depends on a number of factors, including how long you’ve been using the service (new members have a lower limit) and your payment history (always on time = more $).
Benefits of Afterpay
When is using Afterpay a good idea?
“If you had to buy yourself a really nice suit so you could go to an interview and make a good impression,” Ward suggested. “Using Afterpay might be a good way to do it and not to pay interest so long as you can make the payments on time.”
Another instance? When you find a great deal on an item and you know you’re receiving a large cash amount in the near future — like a bonus — but you won’t receive the money until after the sale ends.
Basically, using Afterpay is helpful anytime you have the ability to pay the full amount of the product, but the installment payments allow you to enjoy an extra benefit (like saving money).
Pitfalls of Afterpay
So why shouldn’t you use Afterpay?
Let’s start with this question: Do you carry a credit card balance?
If the answer is “yes,” then although Afterpay might seem like an easy solution for getting that must-have shirt, it’s only providing the illusion that you have money to spend.
If you place an online order and you don’t receive it, it’s up to you to resolve the issue with the retailer. Installment payments will continue despite the order not being delivered.
“If you have a credit card balance and it’s not being paid off every month, I think that’s a moment to pause and see if there’s a different way to get what you need or really evaluate if what you’re trying to buy with Afterpay is something that you truly need,” Ward said.
And if you have any trouble with making an installment payment, you’ll get hit with a late fee. For a single purchase, that might not seem like much, but if you’re using Afterpay for multiple purchases, that’s a lot of payments to track — and a lot of fees to rack up.
“It’s very similar to someone who’s using a credit card and keeping a balance,” Ward said. “You’re spending money that you don’t have yet.”
Additionally, Afterpay isn’t necessarily a reliable source for payments, as you never know exactly how much you can spend on any particular purchase or how many active orders you can have before you’re denied.
Ward suggested that instead of Afterpay, consider applying for a credit card with a very low balance that also offers a grace period (most issuers do, but check the terms of your agreement).
By charging small amounts that you pay off each month, you’ll enjoy the benefits of the grace period between the time of purchase and your credit card due date.
And by using a credit card, your on-time payments will be reported to the credit bureaus, thus helping you build your credit score, which installment payments can’t do.
Afterpay vs. Credit Card
So is a buy-now-pay-later service like Afterpay better than a traditional credit card? Here’s a side-by-side comparison to help you make the best choice for you:
|Accepted By||More than 64,000 locations, including Forever 21, Free People and World Market||Major credit cards (like MasterCard and Visa) are accepted almost everywhere, including in foreign countries.|
|Payment Schedule||Pay in four installments, due every two weeks.||If you do not carry a balance and your credit card issuer offers a grace period, by law the grace period must last at least 21 days.|
|How Does It Affect Your Credit Score?||Afterpay doesnu2019t do a credit check before you apply, and on-time payments won't improve your credit history. However, the fine print on the Afterpay website indicates that the company can report late payments, which could affect your score.||Issuers perform a hard credit check when you apply, which could lower your credit score temporarily. A history of on-time payments can establish your credit history and improve your score. Late payments hurt your score.|
|Interest Rates||Interest-free.||If you carry a balance, youu2019ll accrue interest daily. Average credit card interest rate is 14.65%, according to the Federal Reserve.|
|Late Payment Fee||Late fees are either $8 or up to 25% of your initial order value u2014 whichever is less.||Credit card issuers can charge a late fee of up to $28 the first time you're late and up to $39 if you've been late on your payment within the past six months.|
|Minimum Purchase||Although Afterpay doesnu2019t specify a minimum purchase amount, stores typically do.||Typically, no minimum purchase, although some merchants may require a minimum transaction amount to offset processing fees.|
|What is the Limit?||Individual purchaseu2019s approval is based on a variety of factors, including your history of on-time payments with Afterpay u2014 newer shoppers will have greater restrictions. If you miss a payment, you wonu2019t be able to make any further purchases.||Your credit limit is outlined in your credit card agreement. The average credit limit is more than $22,000, according to Experian.|
In the end, whichever you choose, so long as you use the services responsibly — read: you pay off your balance on time every time — you can enjoy the benefits of either.
Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.