The pros and cons of installment payments

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You can use buy now, pay later for just about everything these days.

Since the start of the pandemic, installment payments have exploded in popularity along with a general surge in online shopping.

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In some cases, spreading out the cost of a big-ticket purchase — like a Peloton, for example — makes financial sense, especially at 0%. Yet consumers can run into trouble if they are juggling too many payment plans at once.

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These days, most consumers will see a buy now, pay later option when shopping online at retailers like Target, Walmart and Amazon, and many providers are introducing browser extensions, as well, which you can download and apply to any online purchase. Then there are the apps, which let you use installment payments when buying things in-person, too — just like you would use Apple Pay.

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Nearly 45% of shoppers have now signed up for at least one buy now, pay later plan, according to a survey by DebtHammer.org — a 41% jump since April of last year.

Of those who’ve used the installment payment plans, 22% regret their decision, the report found.

Roughly 30% said they’ve struggled to keep up with the payments and have had to skip paying an essential bill to avoid defaulting.

Miss a payment and there could be late fees, deferred interest or other penalties, depending on the lender.

Afterpay, for example, charges an initial $10 late fee and another $7 if the payment is still outstanding one week later. (CNBC’s Select has a full roundup of fees, APRs, whether a credit check is performed and if the provider reports to the credit scoring companies, in which case a late payment could also ding your credit score.)

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Separate studies have also shown that installment buying could encourage consumers to spend more than they can afford on impulse purchases.

“People are buying ‘wants’ not ‘needs,’” said Howard Dvorkin, CPA and chairperson of Debt.com.

Consumers are more likely to tap buy now, pay later on purchases such as jewelry or clothing, for example, rather than an appliance repair, he said. However, those discretionary purchases should be made only if you have the cash on hand, he added.

“At the end of the day, you shouldn’t be buying things you don’t have money for.”

The Consumer Financial Protection Bureau said it is opening an inquiry into popular buy now, pay later programs Afterpay, Affirm, Klarna, PayPal and Zip.

The financial watchdog said it is particularly concerned about how these programs impact consumer debt accumulation, as well as what consumer protection laws apply and how the payment providers harvest data.

“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately, too,” CFPB Director Rohit Chopra said in a statement.

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