Deep into an online shopping session, you find yourself looking at a budget-breaking dress. Ideally, you would save it to your wishlist and revisit when it’s on super-sale, but with the holidays coming up, it would be perfect for so many events.
That’s where companies like Afterpay or Affirm come in. With the “buy now, pay later” structure, this option is popping up online at more and more stores like Anthropologie, Revolve, and Reformation. The concept of getting an item immediately and paying for it later is not new, but with no interest and no fees, this is a bit unique. And as always, when it comes to money, it’s complicated.
How does it work?
With Afterpay, the cost of the item is spread out over four installments, with the first occurring at the time of purchase. The next three payments are due every two weeks. This is not like a loan or a credit card, with which you may have to wait a bit to get approved. With Afterpay, the approval decision is almost instant.
How do you get approved?
To get approved with Afterpay, you must be 18 or older and have a credit or debit card. Afterpay does not do a credit check; instead, they use proprietary technology to determine if they will approve your purchase. That means this could be an option for someone who’s unable to get approved for other forms of credit like a loan or a credit card. Beware: this does not mean you can’t be dinged if you don’t make all your payments on time, and it does not help you build credit. Afterpay reserves the right to satisfy any debt you owe them through legal means if necessary, including things like collection agencies that get reported to credit bureaus, but pretty much otherwise does not interact with these agencies. This means that your on-time payment will not be reported.
Is there a limit?
Purchases can be as low as $35 and the maximum depends on the retailer. But remember that proprietary technology Afterpay uses for approval? That technology is also how they determine how much you can get approved for.
Because the technology is proprietary, the exact parameters of what they’re looking for are secret. But according to the FAQ listed on their site, they’re looking at things like what kind of funds you have in your account, how long you have been using their services, and how much all of your outstanding debt to them would be.
What are the terms?
When it comes to money, there is no such thing as free — you always have to read the fine print. While you will not pay extra, the retailer pays Afterpay a four percent commission of every purchase. That means the store is handing over all risk that the customer may not pay to Afterpay. And if you don’t pay in full and on time, all of the no-fee promises go out the window. After 10 days of no payments, you’re charged a late fee capped at 25 percent of the order value, and you can only be charged one late fee per installment. This can still add up, all when the whole reason for using the service is to not pay that much money upfront.
On the bright side, there aren’t any prepayment penalties, which means that you can pay in full before the due date without incurring any fees. While it might seem a little crazy that you could pay a fee for being early, some businesses charge a fee to make sure they get what they would have been paid in interest. With Afterpay, they’ve already earned their commission from the retailer.
What are the alternatives?
If you aren’t paying Afterpay back through a debit card, it is important to note that paying with a credit card and paying with Afterpay will be pretty similar. The difference between using a credit card and using a buy now, pay later service like Afterpay is that with a credit card, you start accruing interest right after the payment due date for the full amount. Because a statement is cut once a month, you would most likely be able to split the cost over two cycles even if you pay Afterpay with the credit card.
Additionally, there are several financers like Afterpay who operate for different retailers, like Affirm, which is available at The Everygirl favorites such as Nordstrom and Sephora. While they operate very similarly, they aren’t interchangeable. For example, Affirm lets you choose whether you want to pay for three, six, or 12 months, but charges an interest rate of up to 30 percent. That could be more than your credit card rate. So be safe and make sure you’re aware of what you’re getting into.
The only other real option is saving up and waiting. The bad news is that if it’s a seasonal item, you may not need or want it by the time you have saved enough. The good news is that if you follow the right budget, you might already have enough saved the next time you find yourself in this situation.
Just like everything else when it comes to money, know yourself. Even though Afterpay’s algorithm is meant to keep customers from overextending their budgets, they can only know so much. Be honest about what makes sense for you.