It’s never been easier to buy lots of stuff. Anything you need—a $1,000 mattress, a $2,000 exercise bike—is merely a click away. The only thing stopping you is your budget or your credit card limit. But no more. In the age of online retail, there are now third-party sites more than happy to finance our impulse buys. Behind their low-interest rates, however, lies several sources of risk.
Often, you may not realize you’re borrowing from a third-party lender and not the retailer. Suppose you decide to splurge of a Peloton bike, which at $2,200 is a bit much for your budget. You may see an online offer to pay for it over time, at 0% interest. The company financing this loan may be one like Affirm, which tend to finance big purchases from Peloton, Wayfair or Casper. Affirm—founded by Max Levchin, who also co-founded PayPal—is one of several such companies that came about to compliment the growing internet market place. Another is Afterpay, which finances smaller ticket purchases at stores like Anthropologie or Urban Outfitters.
At best, these companies offer a low-cost alternative to credit cards. At worst they may end up costing consumers more and offer fewer buyer protections. In some ways, this new breed for consumer finance is modern layaway for aspirational millennials. They tend to finance the purchase of brands popular with the upwardly mobile, and unlike traditional layaway, where a store holds your merchandise until it’s paid off, you get the goods immediately. For consumers with good credit who qualify for 0% interest (depending on the retailer) and make all their scheduled payments, it can be an attractive alternative to a credit card which typically charge 17 to 18% annual interest.
But if you miss payments, you can end up with late fees (Affirm does not charge late fees) or be subject to higher interests rates—as much as 30%. Overall, it requires taking on some risk: If anything goes wrong, you may wind up paying more in fees than you would have with a credit card, the return policies are not always clear, and you don’t get the same refund protections you might have with a credit card. If you end up returning an item you may not be refunded what you spent on interest payments. The debt does not add to your credit card debt (or appear on any statement), which may make it hard to keep track of all you owe, nor will you collect points. And if you miss a payment, it will harm your credit.
There is also evidence these services may compel you to spend more. As Affirm told Consumer Reports “merchants that offer Affirm see a 92% increase in average order value and a 20% or more increase in conversion.” The companies’ goal is to make it easier to spend thousands of dollars on exercise equipment, boho-chic blouses, and fancy mattresses. That all seems fine when the economy is booming and there’s low interest rates. But when the music stops, and unemployment and interest rates rise, consumers may find themselves carrying more debt than they may have realized.