If you’ve been shopping more online lately, you may have noticed a new option to pay when you check out. It’s called a point of sale loans and financial technology companies like Affirm, Afterpay, Klarna and QuadPay are popping up and making it easier for consumers to buy big-ticket items offering low to no interest rates with clear cut terms.
The concept is like layaway but instead of paying and then getting the item, this new option gives customers the item upfront allowing consumers to try before they buy.
Iris Livingston and Israel Diaz were both in the market to buy big-ticket items but neither wanted to pay that lump sum upfront.
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“I was in the market for an air purifier,” said Livingston. “When I saw the price point it was a little bit shocking.”
“I do video production so I bought a desk,” said Diaz. ”The total cost was $1500.”
Both consumers had options to finance their purchase during checkout.
“They were offering a 0% interest 12 months program and it was so easy to input a little information and I got instant approval and that was it. That was literally it,” said Livingston.
Point of sale loans are gaining speed online and quickly gaining popularity because they allow customers to buy now and pay later—typically offering payments in monthly installments with low to no interest.
“Even though the concept is not all that new the way that the consumer is reacting to the concept is very positive,” said Jaclyn Holmes, Director of Auriemma Group Research.
The Auriemma group has been studying installment plans and while historically they have been used for larger ticket items like furniture and appliances---retailers are now offering them as an option for smaller purchases like clothing and makeup.
“Actually, 30% when we filed the research the last time said that they were using it for amounts $100 or below. When in years past you wouldn’t have seen this,” said Holmes.
Popular retailers like Anthropologie, Sephora, Nordstrom and Target are offering point of sale loans as an option to pay.
HOW DOES IT WORK?
At Sephora, you can get a face cream priced at $70 plus tax, but instead of paying that you can instead finance the purchase using a company called Klarna. And pay 4 interest-free installments of $18.95.
“When we thought of what we wanted Klarna to be it was almost like an anti-bank. We wanted to look and feel very different,” said Head of Klarna US, David Sykes.
Unlike other point of purchase loans, Klarna has an app that allows consumers to finance purchases anywhere online.
“There are sort of no strings attached. If something is $100 they only pay $100. It’s very clear that it’s 4 interest-free installments with Klarna and I think that transparency and that accessibly is why we’re so popular,” said Sykes.
The company also has clever ads that target a younger generation leery of traditional credit companies.
“We’ve been lucky to have partnerships with Snoop Dogg. He’s actually become an investor in our company. Most recently Lady Gaga and really importantly engaging with the audience with platforms they’re already familiar with like TikTok is a really important strategy,” said Sykes.
“If you pay them off on time, they’re amazing. You’re taking advantage of a great rate. You have a lot of transparency. But there is an element of managing these,” said Holmes.
Holmes’ research shows that if someone had a positive experience with one, they’re more likely to take another, which is where consumers can get into trouble.
“There will become a point where okay, now I’ve done five did I account for that,” said Holmes.
If you miss a payment you could pay as much as $25 for a late fee and with more shopping online because of the pandemic consumers are looking for alternative ways to pay.
“I really do think COVID has really accelerated that growth. In the past few months alone we’ve added a million new customers,” said Sykes.
"Following stay at home orders, we saw an acceleration of online spending and a spike in categories that make your home more comfortable to live and work in — specifically home office was up 200% and home fitness was up 163%," said Greg Fisher, chief marketing officer at Affirm. "Now, with restrictions starting to lift, we’re seeing consumer spending in lifestyle and home remain up as compared to pre-COVID, with home up 42% and lifestyle, driven by sporting goods, aftermarket auto, and consumer electronics, up 81%."
Both Livingston and Diaz gave the loans thumbs up and said they’d use them again. Financial experts say they can be a great option if you’re good at budgeting and don’t take multiple loans out. Not all companies offer zero percent to finance. Some can go as high as 30% so you’ll need to make sure you read the fine print before you buy!
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