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Remember layaway? Now there’s buy now, pay later, but these plans can be ‘deceptive and abusive,’ and prey on struggling consumers

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By Elice Max

This article is reprinted by permission from  .

You’ve undoubtedly seen the alluring “buy now, pay later” (BNPL) invitations from retailers and apps, allowing you to spread out the cost of buying items over four equal installments, often without paying interest. But should you go for these modern day versions of layaway plans?

Millions of people are. In fact, 42% of U.S. consumers have used buy now, pay later programs. By one estimate, $100 billion in purchases will be made using BNPL apps this year, four times the amount last year. Retailers from Amazon /zigman2/quotes/210331248/composite AMZN -3.66% to Walmart /zigman2/quotes/207374728/composite WMT +0.25% and apps like PayPal /zigman2/quotes/208054269/composite PYPL -3.17% , Square /zigman2/quotes/205989440/composite SQ -4.23% and Klarna are letting shoppers buy now, pay later; even landlords, utility companies and insurers are offering this option.

“It really feels like this is everywhere,” said Ted Rossman, of Bankrate, on the new episode of the “ Friends Talk Money ” podcast co-hosted by Next Avenue Managing Editor Richard Eisenberg. (You can listen to the full episode wherever you get podcasts.)

See : The buy now, pay later wave: Afterpay, Klarna, Affirm and rivals hope to take U.S. by storm

Why some find buy now, pay later appealing

Gian Moore, a Seattle-based interior designer and partner with the online merchant MellowPine, says she likes buy now, pay later because it frees up money for other things. “I only use BNPL for big purchases, with a 0% interest rate,” says Moore.

Unlike the old layaway plans, with buy now, pay later, you can walk out of the store with the item in hand (or whenever the e-tailer’s delivery arrives) after making just the first installment, not waiting until making the final one.

Personal finance writer and “Friends Talk Money” co-host Terry Savage, who calls BNPL plans “come-ons,” noted on the podcast one reason buy now, pay later providers like them: The average order size goes up by 45% when somebody purchases this way, according to Mastercard /zigman2/quotes/207581792/composite MA -0.24% .

Retailers and apps with buy now, pay later arrangements have varying versions of this payment model. But they typically have these elements in common:

  1. Customers make a purchase and choose the buy now, pay later option at checkout.

  2. If the request is approved (it usually is), customers must make the first installment.

  3. The rest is paid through a series of installments which either have low interest rates or none at all.

  4. Payments can be made via debit cards, credit cards, checks and bank transfers.

One thing that separates buy now, pay later from other installment payment models is convenience. You can apply for it at the point of sale through a mobile phone or by using the BNPL option on a website’s checkout page. Much like eCoupons, BNPL makes products more affordable to online customers.

“I think that done right, these kinds of installment plans can actually be a good thing because it buys you some time, but you’re not dragging it out forever,” Rossman said on the “Friends Talk Money” podcast.

How do buy now, pay later plans compare with just paying off items with a credit card?

Credit card users must make at least a minimum payment every month and interest on unpaid balances (typically 16% to 24%) accrues until the purchase is paid for, which can be an unlimited time. So, you can pay at your own pace — at a price.

By comparison, the buy now, pay later plans have a fixed repayment schedule: payments are made either every two weeks, monthly or weekly, depending on the provider.

Watch out for buy now, pay later late fees

Generally, the buy now, pay later amount due is the same for each installment and there’s rarely any interest involved. Approvals are generally quick and painless; there’s little check on your credit history.

However, if you miss a payment, some buy now, pay later providers charge late fees of $5 to $10 or 25% of the transaction. And if you  are  late, you may be reported to credit bureaus, which could lower your credit score.

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