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The next time you’re whipping out your debit card to buy a comfy sweater or an exercise bike or a couch online, look closely.
You might see the option to “pay in installments,” meaning: pay in equal chunks across a series of weeks or months. Sometimes this comes with no interest or fees.
Sounds pretty sweet, right? Well, you’re not the only one who thinks so.
These so-called point-of-sale installment loans, aka “instant financing” or “buy now, pay later,” have exploded in recent years. You’ll see installment plans offered on sites from Anthropologie to Wayfair, and everywhere in between. In 2019 alone, the lender Afterpay saw its sales transactions increase by 140% — to $5.2 billion — and its user base grow to 5.2 million.
But how, exactly, do installment plans work? And are they a good idea? Keep reading to find out.
How do installment plans work?
Installment plans allow you to finance a purchase by paying for it over a set period of time — generally anywhere from a few weeks to a year. Unlike revolving credit, an installment plan is a short-term loan with a predetermined payment schedule. They’re basically a modern version of the layaway, with the big difference being that you get the product after your first installment.
Courtney Ranstrom, a certified financial planner and founder of Trailhead Planners, thinks installment plans are a positive alternative to credit cards.
“When people are able to plan for expenses that may be slightly out of reach with cash flow or savings — but affordable with an installment plan — I think it makes more sense than using a credit card,” she says. Rainstorm added that installment plans are particularly beneficial for younger people who may still be building their credit.
That may be because installment plans often have lower interest rates: Whereas the average credit card APR hovers around 16%, many installment plans don’t charge any interest at all.
Paying back your installment loan
When it comes to paying back your loan, each company works slightly differently. Some companies divide your purchase into 4 even payments — and charge fees but no interest. Other companies might let you determine the length of the loan and the terms of your repayment. Consult with your lender to determine what their payment requirements are.
With any of the lenders, you’ll receive your purchase after making your first payment. For the next installments, you can opt for automatic or manual payments — just don’t miss one, as that can trigger late fees (and potentially damage your credit scores).
Another way to use installment plans is to sign up for a “virtual credit card.” In most cases, you’ll download the lender’s app and enter the dollar amount of the purchase you’d like to make. The lender then generates a disposable credit card number that you can use to pay on any merchant’s website.
Pros and cons of installment plans
Most loans come with their fair share of advantages and disadvantages. Installment plans are no different. Before committing to an installment plan, explore some of the following pros and cons.
|You can pay your loan over time, giving you more flexibility and control.||Installment loans might include interest, which can quickly add up over time.|
|You can borrow a large sum of money to afford a big purchase, like a house or car.||Installment loans may increase the temptation for purchasing things you don’t really need or can’t afford.|
|You can determine the set amount you pay each month, allowing you to better budget for expenses.||Some lenders may charge a penalty fee if you pay off your loan in full.|
Installment loans often have lower interest rates than credit cards or other types of loans.
|Installment loans take time to pay off, making them a financial commitment.|
Tips for making the most out of an installment plan
- Calculate your total amount: Before signing on the dotted line, make sure you know exactly how much the loan will cost over its lifetime. If you have a credit card, compare it to the total you’d pay if you financed the product that way (or with a 0% APR card).
- Understand the terms and conditions: Even if you’re using a lender with whom you’ve done business before, terms can vary depending on the retailer. So be sure to read the fine print.
- Automate it: Most of the point-of-sale installment loan companies allow you to set up automatic payments, which will help you avoid missing due dates. If you’re worried about overdrafting, you can sign up for payment reminders instead (or just become a Chime member and enjoy fee-free overdrafts!).
- Remember that installment plans can complicate returns: Don’t want that new couch after all? If you purchased it with an installment plan, you may need to continue paying your installments until the lender gets confirmation that you returned the item.
What is installment buying?
Installment buying is just another way of describing installment plans. It’s when you buy an item and pay for it over periodic payments (aka installments).
What is an installment fee?
Some installment plans charge fees for things like late payments or paying your loan in full. And because many installment plans don’t charge interest, they might charge a fixed fee in lieu of interest charges. Check with your lender and read the fine print to figure out what installment fees you might be paying. Some fees to look out for include:
- Late fees
- Service fees
- Reactivation or reschedule fees
- Monthly plan fees
- Account closure fees
What is a recurring payment plan?
Recurring payments, sometimes referred to as AutoPay, means the consumer has given permission for a retailer or merchant to deduct payments for goods or services from their credit/debit card or bank account — often on a monthly basis.
Unlike installment plans, which have a known end date for payments, recurring payment plans are ongoing and don’t end until the customer retracts permission for automatically taking payments from their account.
Installment plans can sometimes provide an affordable alternative to credit cards. But that doesn’t mean you should make them a habit.
Only use installment plans when you’re buying something you truly need. Otherwise, installment plans can provide a dangerously convenient way to spend more than you can afford.
The bottom line: Proceed with caution. While installment plans can provide a “good backup” in certain situations, the best plan is to “save up for something” and then buy it outright.