Buy Now, Pay Later

I really wanted to buy it. It was new, shiny, fun and expensive. It was a “want,” but not a “need.” And I didn’t have any money on me. The salesperson said, “No problem. We have a program for that. We call it ‘Buy now — Pay later.’” Great, I thought. I want it. I can have it now. I don’t have to think about whether I really need it, and I don’t have to save for it.

My lizard brain said, “Don’t overthink this. Get it now.” My mouth was ready to say, “OK, I’ll take it. Where do I sign?” But my analytical brain chimed in with, “Wait, what? Don’t I get a say in this? We have some alternatives here. Also, are we even sure we actually need this thing?”

Sellers increase their sales by making the buying process painless. Many buying programs have been around for a long time under different names. The layaway program was popular in the 1930s. The 1940s gave us the 30-year mortgage. The 1950s brought writing checks for purchases, and the 1960s gave us the credit card. Almost every decade seems to bring us an easier way to buy without thinking it through. The new term for this easy buying system is point of sale loans.

A point of sale loan is a way that a seller can work with a lender to approve — or deny — credit to a customer almost immediately. The whole transaction can be completed in a matter of minutes while you wait. You decide to buy, a few clicks on the laptop or phone, and bingo, you own the shiny thing. It can happen in a store or online.

Sometimes, point of sale loans can work in your favor when the purchase you are eyeing is a necessity and you cannot pay for it immediately. In many cases, the seller covers the lender’s fee, and so the buyer pays no interest. In these types of emergency cases, this can be a better alternative to using a credit card, especially if you won’t be able to pay the balance off before interest is due.

For example, let’s say you have to replace your refrigerator because the old one just quit. The best option is to take the $1,000 out of your emergency fund to buy it. The worst option is to put it on your credit card knowing you won’t be able to pay it in full for at least 12 months, racking up credit card fees as time passes. If you don’t have enough in your emergency fund, the point of sale loan may be a good third option. It is better than putting it on a credit card. If the interest rate is 0%, you could save around $170 in interest, in this scenario.

Also, using a point of sale loan will not increase the credit utilization ratio on your credit card, which is a powerful factor in calculating credit scores.

If you opt for a point of sale loan, carefully examine the fine print. There is a wide variation in interest and fees. Some programs will charge 0% interest for a certain amount of time, but others can charge up to 30%. Most will charge substantial fees or an even higher penalty interest if you miss a payment. Also keep in mind that if you fail to pay the full amount when the time is due, interest may be charged on the full price of the purchase.

The first decision is not whether to use a point of sale loan or a credit card. The most important first decision is whether your purchase is a need or want. If you are already carrying credit card debt or you are strapped with a lot of monthly payments, put off any unnecessary purchases until you get your debt paid down.

On the other hand, you may have no choice if that refrigerator or work-required computer keels over. But at least let your analytical brain argue with your lizard brain before you choose which way to pay for it.

For more information on budgeting for purchases, contact a personal financial manager or counselor. And make sure to follow the Office of Financial Readiness, or FINRED, on Facebook, Twitter, Instagram, YouTubeand the FINRED blog.

Written by Dave, an Accredited Financial Counselor® who has been helping families plan their finances for more than 30 years.