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Is using a payment plan for shopping right for you?

Think of the last time you made a major purchase. Maybe it was a new refrigerator, couch, or car. Did you pay up front or over time?

Consumer preferences for pay-over-time options continue to increase. In the past, consumers were more accustomed to pay for large purchases and necessities like homes and cars by installments, over a period of time. They did not necessarily pay smaller ticket items in this fashion, but this trend is starting to increase in purchases of smaller, day-to-day items like clothes, technology, and household goods.

So why do shoppers choose to buy now and pay later, instead of using the traditional one-time payment, when it comes to smaller ticket items? Affordability tops the list, plus some would rather hang on to their cash longer by gradually paying off the purchase. After the pandemic hit last year, some have been wary of letting their bank account balances get too low.

Today, there is significant momentum behind this movement, especially pay-over-time options offered directly from retailers — particularly online shopping — to meet this demand.

While pay-over-time or installment plan is not a new concept; fresher, more integrated pay-over-time options are quickly catching on with the new generation of shoppers. Pay-over-time service providers such as Klarna, Affirm, and Afterpay continue to gain market share, and their services are often found seamlessly alongside your online shopping experience through retailers’ websites. This integration makes it easy for consumers to choose a pay-over-time option, especially when the payment option makes the item seem more affordable and obtainable. Thus, it is no surprise to see Afterpay reporting a 219% increase in user enrollments in 2020.  This growing trend has also made more online retailers eager to join the party.


Is pay-over-time the right payment option for you?

Here are three things to consider.

1. Adopt a future-first mindset

Psychologically, it is enjoyable to “buy now, pay later.” When you pay in small amounts over time, it is easy to fall into the trap of living beyond your means. Each small payment seems affordable and manageable at first, but the collective cost of all items purchased may get lost and get out of hand fast. A $100 outfit would seem like it costs only $25 to own, even though it takes four $25 payments to pay off. A $2,000 couch would initially seem like it only cost $250 to take home, when in fact you are really paying the same amount eight times over a period of time. And all those bills add up. That is why it is important to find a way to hold yourself accountable and keep purchases within your budget.

2. Consider credit score

It can be fun to “buy now, pay later” — until it hurts your credit score. Pay-over-time options do not build credit unless the company specifically reports the credit to a credit bureau. Companies such as Affirm only report to one credit bureau, meaning you are not building as much credit as you think you are, like if you had purchased it in full using your credit card. In addition, failing to pay can hurt your credit score just as much as a one-time purchase would.

3. Diligently monitor terms and conditions

A pay-over-time option may not feel like you’re taking out a loan, but that is exactly what you are doing. Make sure to treat it as such and remember that it is still a debt obligation. Shoppers need to have the fortitude not to overuse the privilege. It is important that you closely monitor your repayment schedules. Otherwise, you may end up joining the 43% of buy-now-pay-later online shoppers who have missed a payment, which can result in late fees or impact the interest rates associated with your payment plan.

The pay-over time option trend is here to stay. Although this option gives you more freedom and flexibility in your purchases, it can also cause you to be careless with your credit and money. If you can manage and monitor payments, plus understand the potential impact on credit scores, then you can take advantage of the trend while still staying financially stable.



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This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.

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