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Groupe de Fitness

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Archipp Konovalov
Archipp Konovalov

Buy Now Pay Later No Interest

For those unfamiliar, Apple Pay Later is a new financial service from Apple that will allow customers in the United States to split purchases into four equal payments across six weeks, with no fees or interest. The feature will be available anywhere Apple Pay is accepted online or in-app. Apple Pay Later was announced at WWDC 2022, but is only now beginning to launch.

buy now pay later no interest

If you've done any online shopping recently, you may have seen an option that would allow you to pay a little bit now and the rest later, interest free. Buy now, pay later companies have exploded in popularity during the pandemic. Klarna, Afterpay and Affirm are just a few of them. Now Apple is getting into the game with Pay Later. So what's behind this trend, how does it work and who's actually paying? For that, we've called Planet Money's Alexi Horowitz-Ghazi. He looked into buy now, pay later services in a recent Planet Money episode. Alexi, welcome.

HOROWITZ-GHAZI: Sure. So buy now, pay later is a form of consumer credit - like credit cards or payday loans or other things we've seen - but it's in kind of a new form. So the way this works is you'll be shopping online or, increasingly, in more and more stores IRL, and instead of paying the total price with a credit card or a debit card or something, you'll be offered a buy now, pay later option. Usually it's this pay-in-four model, which means they'll ask for installment payments. You'll pay the first installment immediately using, you know, whatever bank account or credit or debit card you wish. They'll take that initial payment, and then you'll pay them back in regular installments. And it's all interest-free. It works kind of like old-fashioned layaway, except with buy now, pay later, you get whatever it is you're buying immediately.

HOROWITZ-GHAZI: Right. So usually, lending money is profitable because of some combination of interest and fees or maybe collateral. There isn't collateral with these things. They're not going to, like, repossess your Nike sneakers and try to resell them to recoup, you know, your missed payments or anything. And there isn't any interest, as you mentioned. And the fees, while there are late fees and there are kind of forms of interest that kick in if you repeatedly don't pay, the fees really aren't that high. And that isn't kind of the center of the business model. The way these companies are making their money is they're actually taking fees from the merchants - so the companies that are selling you the goods you're buying online or in person. And they're charging somewhere between 4 and 9.5%, which can be a lot higher than what credit cards usually charge, which is between 2 and 4%.

HOROWITZ-GHAZI: Presumably, that is happening to some degree, but it's still kind of early days for this model. And for the most part, it seems like the model actually works for everybody involved because what the buy now, pay later companies are offering these merchants is the promise of a lot more sales. So they're bringing in a bunch of new customers, people who might not have used credit cards or who might be kind of allergic to the idea of using credit at all - so like, a lot of Zoomers and millennials who grew up in the wake of the financial crisis and just don't want to use credit cards - and people who, you know, might have thin credit histories or bad credit and might not otherwise get access to things like credit cards and other forms of loans. So they're bringing in new people, and then also, there's something about the psychology of kind of breaking down the total price into these installment - into these smaller installment prices that make people a little less hesitant to complete their order - you know, to click buy when they're at the end of their purchase, when they're in the checkout.

HOROWITZ-GHAZI: Right. So, you know, it is - these payments are interest free, which means it can be pretty cheap money, you know, if you live up to all the terms and conditions of the loans. The problem with these is kind of the flip side of being outside of the normal credit-reporting system. It means it's easier to get these buy now, pay later loans in the beginning. But it also means that each of these loans is not being reported to any sort of central repository, which means that you can take out, you know, five or six different loans from five or six different companies without any of them knowing about it. It means you can get into this whole whirlwind of payments and get into trouble pretty quickly.

And this is one of the things that's raised red flags for, you know, consumer advocate groups and regulators. Last fall, the Congressional House Financial Services Committee held a hearing looking into all of this. And right now, the Consumer Financial Protection Bureau has an open inquiry into the buy now, pay later industry. They're looking at the risk to consumers of overextending themselves, what kinds of data are being gathered by these companies and how it's being used and how these services fit into existing regulations for other kinds of credit products.

HOROWITZ-GHAZI: Well, buy now, pay later companies started out in places like Australia and Scandinavia, and they've been kind of growing momentum over the years. They came to the U.S. largely around 2015, and they kind of were at this, like, critical mass moment just as the pandemic started. They were starting to be taken up by larger and larger companies, eventually places like Amazon and Walmart and Target, which exposed them to a lot more people. And this happened just as a lot of lockdowns were happening, and a lot of people were turning to the internet and online shopping as a form of retail therapy or just a place to find basic essentials as they scrambled to figure out how to work from home. And it kind of rode this huge explosion in online shopping that's happened over the years since the pandemic started. It just became a new, ever-more-convenient way for people to do their online shopping.

The new feature, called Apple Pay Later, lets customers split payments for purchases into four installments over six weeks, with the first installment due at the time of purchase. Apple users can also apply for a loan within the Wallet app, ranging from $50 to $1000, with no interest or fees, to make online or in-app purchases.

Apple's move comes as a growing number of consumers have turned to buy now, pay later services to stretch their budgets at a time of high inflation and broader economic uncertainty. Other popular services that offer the same payment option include Affirm, Klarna and Afterpay.

Lauren Saunders, associate director at the National Consumer Law Center, advises borrowers to avoid linking a credit card to buy now, pay later apps whenever possible. If you do, you lose the protections you get from using the credit card while also opening yourself up to owing interest to the card company.

As the cost of living increases, some shoppers have started breaking up payments on essentials, rather than just big-ticket items like electronics or designer clothes. A poll by Morning Consult last fall found 15% of buy now, pay later customers were using the service for routine purchases, such as groceries and gas, sounding alarm bells among financial advisors.

Hicks points to the rising number of delinquent payments as a sign that buy now, pay later could already be contributing to unmanageable debt for consumers. A July report from the Fitch ratings agency found delinquencies on the apps increased sharply in the 12 months that ended March 31 of last year, to as high as 4.1% for Afterpay, while credit card delinquencies held relatively steady at 1.4%.

BNPL apps work differently depending on the service and installment plan. Many offer a pay-in-four installment system, where you can split the cost into four different installments over a period of six weeks, with the first installment due upfront. The majority of pay-in-four plans don't charge interest. Other BNPL apps offer monthly installment plans, with interest rates that are usually between 10% and 30%.

Affirm stands out among BNPL competitors for a few reasons. First, it offers a variety of payment options, allowing flexibility to pay loans back. Like other BNPL apps, it offers a Pay in 4 option, formerly called Split Pay, which divides costs into four interest-free payments, paid every two weeks. Affirm's version gives you the option of stretching the timeline to eight weeks, eliminating the need for an upfront payment.

Its biweekly and monthly payment plans range from six weeks to 60 months -- a timeline that is far more flexible than other BNPL apps. Affirm also has a high purchase limit of $17,500 -- but whether you qualify for this amount will depend on your credit score, payment history and ability to pay. Affirm also offers instant prequalification, allowing you to see upfront what you're likely to be approved for and how much it will cost you in interest (if interest applies).

Affirm's interest rate maximum of 30% is definitely on the higher side, but it's worth noting that BNPL apps charge simple interest, not compound interest, like credit cards. Compound interest is based on your loan amount and any interest that accrues, which can get quite expensive if you forget to pay your bill on time. Simple interest only accumulates on the loan itself. Affirm also lets you calculate how your interest will impact your total loan price, which is a plus. And it doesn't charge late fees.

Klarna is a user-friendly BNPL app that finances purchases three ways: Pay in 4, Pay in 30 and monthly financing. Pay in 4 allows you to divide costs into four interest-free payments, paid every two weeks, with the first installment due upfront. Through Pay in 30, you'll receive a digital invoice for the full amount 30 days after your purchase, interest-free, without having to put down a payment upfront. Klarna's Pay in 30 option is particularly notable, as it allows users without the funds to make an upfront payment access to a BNPL option. Monthly financing enables you to make larger purchases, paying back the amount due monthly for up to 36 months, albeit with an interest rate of up to 29.99% tacked on. 041b061a72

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