SALT LAKE CITY — If you shop at Walmart or buy gifts online this holiday season, don’t be surprised if you’re offered a payment plan at checkout. But you might want to look into it before saying yes.
The new form of payment is called a “point-of-sale” loan, and it’s a high-tech version of installment loans traditionally offered by finance companies and banks. Consumers can get approved by answering as few as five questions, and some of the loans are interest free. They’ve been described as reverse layaway.
But unlike layaway, if you don’t pay off this loan, it winds up on your credit record. And for people already struggling to make ends meet, even four interest-free payments amount to more debt.
“If I can’t afford this thing in the first place, why am I financing it? That’s a good question that should come into everyone’s mind,” said Brian Riley, director of the credit advisory service of Mercator Advisory Group, based in Marlborough, Massachusetts.
But providers say point-of-sale loans help consumers by making large purchases more manageable, and they tout consumer-friendly policies that aren’t often found with traditional lenders. For example, Affirm, the company that offers point-of-sale loans at Walmart, doesn’t charge late fees for a missed payment.
Affirm was founded in 2012 by Max Levchin, a co-founder of PayPal, who wanted to create a “better alternative to credit cards,” said Ellen Kiehl, Affirm’s manager of consumer communications. “He really wanted to create a product that was very honest, very transparent, about what consumers were getting into,” she said.
Affirm, Bread, Afterpay and many other companies that offer point-of-sale financing are known as “fintechs” — short for financial technology companies. Although some are backed by a brick-and-mortar bank, fintechs now have the largest share of unsecured personal loans in the U.S. and their influence is helping to reshape the credit industry.
Even traditional lenders are getting in on the action. Rhode Island-based Citizens Bank, for example, is offering point-of-sale financing for Microsoft’s Xbox All Access program on purchases made through Amazon, with no interest charged.
But not every point-of-sale loan is interest-free; many base terms on the applicant’s creditworthiness. And the speed of approval makes it unlikely that shoppers will read all the details before accepting the deal. Here’s what every consumer should know before agreeing to a point-of-sale loan.
Benefit or gimmick?
At nearly 4,000 Walmarts across the U.S., shoppers will see signs that show how much a big-ticket item would cost every month on an Affirm payment plan. The shopper can apply for a “real-time” loan using a phone app while in the store. If approved, they present a bar code when checking out; no money or credit card needed.
Or, they can apply at home on the Affirm website before heading out to shop.
Affirm and other companies that offer point-of-sale loans say they’re friendlier to consumers than other forms of credit because of the speed of approval, transparency about costs and higher acceptance rates. In a report issued in November, the Online Lenders Alliance said point-of-sale payment plans, as well as other forms of online loans, can be “an affordable and attractive option” for the 4 in 10 Americans who have subprime credit scores.
Nearly half of people with credit scores of 680 or lower were rejected for credit in the third quarter of 2018, the alliance said, arguing that options are needed for people who might otherwise bounce checks, file for bankruptcy or use maxed-out credit cards on which they can only make minimum payments.
But critics of point-of-sale loans say they’re just another way of exploiting struggling Americans.
“I get why this is attractive. It feels cleaner than credit-card debt. But I don’t see it as any less risky than a credit card,” said Deborah Thorne, an associate professor of sociology at the University of Idaho and former director of the Consumer Bankruptcy Project at Harvard University. “I think it’s a gimmick.”
With consumer credit-card debt at the highest levels since it contributed to the Great Recession, some analysts warn that this new form of debt, which didn’t exist in 2008, could portend economic disaster for both individuals and the nation.
Affirm has 3 million-plus customers, half of them under the age of 40. Another point-of-sale loan company, Klarna, is based in Sweden, but reports having 6 million new customers in the U.S. this year, shopping online at stores such as Wayfair and H&M.
And one financial analyst says there are upwards of 30 million Americans who might find a benefit in this payment option. But if they wind up buying more than they should and are unable to make the payments, their credit scores will suffer eventually.
Financing of the future?
To apply for a loan with Affirm, most shoppers only have to provide five pieces of information: their name, email address, cellphone number, date of birth and the last four digits of their Social Security number.
That’s enough for the company to instantly perform a “soft” credit check, which does not affect the consumer’s credit score. When an offer is made and the loan accepted, it will likely change a credit score because it adds to a person’s total line of available credit. Affirm reports timely payments to credit agencies, just like credit-card companies do. It also reports delinquencies if someone has not made payments for 90 days.
Virtually instant credit is not new, nor are loans for small-ticket items, said Riley, of Mercator Advisory Group. He remembers when people hawking credit cards at stores would give you a free T-shirt for applying, and when businesses like Household Finance would extend credit to buy a bed or washing machine. But point-of-sale loans are different.
“What’s unique is that (point-of-sale lenders) are not banks; they’re fintech organizations,” Riley said. “And they are causing concern with many (credit card) issuers because they can shave off volume,” meaning they stand to take business away from traditional lenders.
Credit-reporting agency TransUnion noted in October that the number of new credit cards issued in the U.S. has dropped for nine consecutive quarters, saying “The emergence of point-of-sale financing is likely contributing to recent declines in retail card originations.”
No wonder traditional lenders have decided to join the trend.
“Consumers want affordable ways to make purchases without taking on additional credit card debt,” Brendan Coughlin, president of consumer deposits and lending at Citizens Bank, said in a statement, adding, “we believe that it will be the model for how purchases are made and financed in the future.”
Apple is another company venturing into interest-free payment plans via its new credit card. Apple Card holders can pay for new iPhones over 24 months, with no interest accrued.
Point-of-sale loans, like all forms of credit, are governed by the federal Truth in Lending Act, as well as other federal laws that, among other things, limit the amount of interest charged to members of the military, restrict sharing of personal information and prohibit consumers from abusive forms of debt collection.
While Affirm sees its partnership with Walmart as a way to help cost-conscious Americans, Thorne, at the University of Idaho, says the financing offer encourages people who may already be struggling to take on new debt.
“It’s not the privileged who are shopping at Walmart,” Thorne said. “It’s people who are already struggling.”
Klarna won’t approve a new loan until a customer pays off the first. And Affirm’s Kiehl said her company ensures that a shopper has the resources to pay for a purchase before approving the loan. But Thorne counters that this may not be the case six months from now.
“People have the best of intentions that they will pay it, but circumstances change,” she said.
Moreover, consumer debt is rising again.
In its November report on debt and credit, the Federal Reserve Bank of New York said total U.S. household debt increased by $92 billion to hit $13.95 trillion in the third quarter of 2019. It was the 21st consecutive quarter with an increase, and Americans now owe $1.3 trillion more than they did in the third quarter of 2008, the Federal Reserve said.
Mortgages represent much of that debt — $9.44 trillion — but consumers also accrued $13 billion in new debt on credit cards in the third quarter, as well as $20 billion more in student loans.
Meanwhile, unsecured personal loans, which include point-of-sale loans, are climbing as well. Personal loan balances over $30,000 are up 15% in the past five years, credit agency Experian has said.
Americans have about $115 billion in personal loans, compared to $880 billion on credit cards, Heather Long of the Washington Post reported.
“But personal loan debt is now back at levels not far from the January 2008 peak, and most of the FinTech companies issuing this debt were not around during the last crisis, meaning they have not been tested in a downturn,” Long wrote.
“The finance industry is always trying to convince us that there are few risks to borrowing and overleveraging is not a problem,” Christopher Peterson, a University of Utah law professor and former adviser to the Consumer Financial Protection Bureau, told the Post. But Peterson disagrees. “Overleveraging yourself is risky for individuals and for our country,” he said.
That was evident just 20 years ago, when the nation was suffering the effects of the Great Recession, which was preceded by a “historic run-up in household debt,” according to a March report from the Federal Reserve Bank of New York.
It could happen again. Writing for Forbes recently, Christian Weller, professor of public policy at the University of Massachusetts-Boston, warned that household debt, including credit balances, will play a large part in the next economic downturn. “People borrow money not because they want to, but because they have to,” Weller said.
But in its November report, the Online Loan Alliance argues that nontraditional loans serve as a safety net for many Americans, who might not be able to buy new tires for a car or put gifts under the Christmas tree without a payment plan. “With 100 million Americans currently considered non-prime and nearly four out of every ten Americans unable to cover a $400 emergency expense out of pocket, credit options for these consumers are vitally important,” CEO Mary Jackson said in a statement.
Terms may vary
Shoppers can check the Affirm website to see what they can buy over time interest free. Peloton, for example, offers 0% financing for its $2,245 bike through Affirm.
A payment plan at Walmart, however, is not interest free. People offered point-of-sale loans there may pay simple interest between 10%-30% APR, and the terms are not displayed until checkout.
Although Affirm does not reveal what percentage of applicants are approved, Kiehl said that the average interest rate is 17%, across all loans and vendors.
Affirm’s arrangement with Walmart allows people to make a purchase online or in retail stores. The item can be between $144 and $2,000 and can be paid over three, six or 12 months. But not everything Walmart sells is eligible for terms; exclusions include food, firearms, tobacco and pet supplies.
John Ulzheimer, formerly of FICO and Equifax and author of “The Smart Consumer’s Guide to Good Credit,” said 17% interest for this type of loan is about average. “Retail store credit, whether it’s a card or a loan, is very expensive. They all have interest rates in the low to high 20s, even if you have fantastic credit.”
That rate, however, is “horrible” compared to typical interest charged on a car loan or mortgage, but American consumers are conditioned to accept higher rates for a general-use card, he said. “Twenty-seven percent interest on a pair of $79 boots doesn’t look like a menacing number.”
That said, credit cards aren’t always a bad deal for consumers, Ulzheimer said, noting that interest is optional; if you pay the balance off each month, there’s no interest charged. But for people who don’t pay their balances every month, a fixed beginning and end to the payments may be helpful, especially for a purchase with zero or low interest. If you’re among consumers who are charged interest, you should know that you won’t get the interest back from Affirm if you wind up returning the flat-screen TV you bought with a payment plan. (The company will, however, refund your principle.)
“If you’re going to get free money for three or six months, that’s not a bad deal, of course,” Ulzheimer said. “But you have to make sure you understand what the terms are. I always tell people, ‘The big print giveth, the small print taketh away.’”
Riley, at Mercator Advisory Group, said he generally believes that people would do better getting a low-interest credit card and paying a purchase off quickly. “I would argue that if I use my Chase Freedom card, I’m going to get 2% back on (the purchase) so why go through the fuss of it?”
But for people whose credit scores are beneath 720, “where credit limits become tighter, that’s where (point-of-sale loans) fit pretty well. They’ve got big appeal to millennials who don’t always use credit cards. The ones that really benefit are the ones who are new to credit.
“In the U.S. market, that could be a lot of people; it could easily be in the range of 30 million people as an addressable market.”
Thorne, at the University of Idaho, remains skeptical. “I don’t think there has really ever been a lending scheme that was for the benefit of the borrower,” she said. “Even a traditional, dependable, 30-year mortgage is never in the best interest of the borrower; it’s for those of us who can’t do anything different.”