By Jackie Veling
A point-of-sale loan allows you to split a purchase into a series of smaller payments, so you can buy now and pay later.
In recent years, point-of-sale financing has grown rapidly in the United States, with lenders like Klarna, Afterpay and Affirm now partnering with large retailers including Macy’s, (M) – Get the Macy’s Inc report Bed bath and beyond (BBBY) – Get the Bed Bath & Beyond Inc. report and Walmart, (WMT) – Get the report from Walmart Inc. to offer the option to consumers.
Choosing a point-of-sale loan can make sense if it charges no or minimal interest and the payments aren’t weighing your budget. But if the interest rate is high, consider other types of loans to finance your purchase, even if they are less convenient.
How to get a point-of-sale loan
To apply for a point-of-sale loan, you will need to create an account with the lender. This is usually built right into your payment experience.
Once you have registered, you will provide basic personal information such as your name, date of birth and address. You may also be asked for your Social Security number, and most businesses will perform a gentle credit check, which won’t impact your score.
You will then see the breakdown of your payment plan options. Point-of-sale loans divide your balance into installments, spread evenly over an agreed-upon repayment term, with the first installment due at the cashier.
For example, if your total is $ 100 with a two-month interest-free repayment plan that expires every two weeks, you would pay four installments of $ 25. After entering your payment information and billing address, and agreeing to the terms and conditions, your debit or credit card will be charged for the first payment and automatically charged every two weeks until your balance is fully paid.
Much like a store credit card application, the entire process takes anywhere from seconds to minutes. The approval decision is instantaneous.
Depending on the finance company, interest and late fees may apply.
Are POS Loans a Good Idea?
Point-of-sale financing can be a good option when you need to make a purchase that you can’t fully cover and the installments fit comfortably within your budget. You should also be looking to pay interest from zero to a minimum.
Consider a POS loan if:
You are new to credit: Companies that offer point-of-sale financing have more lenient criteria when deciding whether or not to approve you for a loan. While some lenders check your credit score, others focus on the funds available on your debit or credit card, the repayment term, and the price of your purchase.
Some companies also report your payment history, which can improve your credit score if you make all payments on time.
You make a large one-time purchase: Point-of-sale loans are useful when you need a new mattress, furniture, or other expensive item, but don’t have a credit card or prefer the simplicity of fixed monthly payments.
You won’t pay a lot of interest: While some retailers may offer zero interest rates, this will not always be the case. For example, annual percentage rates at Affirm can be as high as 30%. To finance an $ 800 purchase on a 12 month repayment plan at 25% APR, you would pay $ 113.68 in interest.
You can afford the payments: The convenience of point-of-sale financing can tempt you to overspend. If you have a balance on your credit cards or have other debt, taking out a loan for non-essential purchases is not a good idea.
You plan to keep the item: If you want to exchange or return your purchase, you usually need to work directly with the retailer, not the lender. If you don’t get a full repayment, you may still have to pay off part of your loan or risk a blow to your credit.
Where to get a POS loan
Unlike other types of loans, you don’t have to search for the right lender for a point-of-sale loan. The lender is determined based on the stores you shop from, and the main players are Affirm, Afterpay, and Klarna.
To affirm works with trendy wellness retailers like Peloton, (PTON) – Get the Class A report from Peloton Interactive, Inc. Casper (CSPR) – Get the Casper Sleep, Inc. (CSPR) report and Mirror and negotiates its loan eligibility criteria and interest rates with each retailer, meaning your repayment term options and interest rate may change depending on where you shop. While some of Affirm’s partner stores charge no interest, others may charge up to 30% APR. Affirm never charges late fees.
Afterpay, which partners with established retailers like Old Navy, Gap (GPS) – Get the Gap, Inc. (GPS) report and Bed Bath & Beyond, offers a simpler model. Regardless of the retailer, you’ll make four interest-free payments that are due every two weeks. These installments are split evenly, although your first payment might be higher if your purchase is large.
As long as you pay on time, there are no additional charges with Afterpay. However, if your payment is not received within 10 days of the due date, you will be charged a maximum fee of $ 8.
Klarna differentiates itself by focusing primarily on its mobile app experience. Once you download the Klarna app, you can shop at stores like Sephora, Foot Locker (Florida) – Get the report from Foot Locker, Inc. and Macy’s uses the Klarna Payment Plan – your total balance divided into four payments, paid every two weeks, with no interest. If Klarna is unable to collect payment after two attempts, a late fee of $ 7 will be charged.
Alternatives to POS loans
If you are making a larger purchase, you might want to research what annual percentage rate you might get on a Personal loan. As with a point-of-sale loan, you can pre-qualify with a lender and see your rates without affecting your credit.
If you qualify for a lower APR on a personal loan than on a point-of-sale loan, a personal loan will likely be the most affordable option.
If you have good or excellent credit, you can also try qualifying for a 0% APR rate credit card. Some cards offer an introductory period of up to 18 months, during which no interest will be charged on purchases. You may also be offered a sign-up bonus or access to a rewards program.
If a point-of-sale loan offers a similar term but with interest or charges applied, a 0% card would be the cheapest option.
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Jackie Veling is a writer at NerdWallet. Email: [email protected]