Nearly anytime I shop online, I notice a “pay later” option at the checkout screen. The promise sounds intriguing — make your purchase today, then split up your payments over the next few weeks.
In reality, this feature is called a point of sale loan. The terms differ depending on a number of factors, including your credit and your purchase. Here’s what to expect with this type of financing and when to use (and avoid) point of sale loans.
What is a point of sale loan?
A point of sale loan lets you pay for an item through monthly installments rather than the entire price upfront. Lenders partner directly with retailers so that you can apply instantly at the checkout screen.
Some options require a hard credit check, while others are short-term installment agreements that rely only on a soft check to ensure you pay your bills on time. Depending on your credit history and the size of your purchase, you could even snag a 0% interest rate as long as you pay on time.
Most point of sale lenders don’t report the borrowed money on your credit report. But if you’re significantly late on a payment, the account will likely be reported and damage your credit score. Regardless of whether or not the balance is reported to the credit bureaus, the most important deciding factor is whether or not the payments are affordable.
How to get a POS loan
The process for getting a point of sale loan is simple. There is usually a “pay later” option at checkout for most major online retailers. From there, you’ll fill out the application form, which will vary slightly depending on the lender. Expect to provide information like your name, contact information, date of birth, and Social Security number. It’s important to find out what kind of credit check they’ll do. A soft pull is preferred since it has no impact on your credit score.
Once you apply, the lender will immediately give you an approval decision. If it’s a yes, then you’ll see your payment options. Look for the APR (if there is one) and the total cost to borrow the funds. Then check how long you have to repay and how frequently your payments are due; oftentimes, point of sales loans require biweekly payments.
Also, find out what happens if you decide to return an item you financed with a point of sale loan. If you don’t receive a full refund, you may still be responsible for the outstanding balance on your loan. You could also potentially be hit with a prepayment fee, depending on the loan terms.
An example of a point of sale lender is Affirm. They partner with a range of retailers so that you can make payments on your purchases for up to a year. There are no hidden fees, including no late fees or prepayment penalties, and interest rates start at 0% and go up to 30%.
When you click to pay with Affirm at checkout, you’ll see different loan options outlining the size of your payment, length of the repayment term, interest rate, and total cost of the loan. Pick which one you want and then download the Affirm app to make monthly payments.
Who should use a point of sale loan
A point of sale loan isn’t right for everyone, but there are several scenarios when it does make sense. Be sure to meet most or all of these criteria as you consider paying for a purchase later.
Those who will pay no or low interest
With good credit and a lower-price purchase, you may qualify for a no-interest payment plan. If that’s the case, it may be helpful to spread out your payments over time.
Those who don’t qualify for typical credit financing
People who are new to credit may have a better chance at qualifying for a point of sale loan than other kinds of financing, like a credit card. It may even be worth finding a point of sale lender that does report to the credit bureaus so you can build a positive history.
Those who can make the payments fit into their budget
No matter what kind of rate you qualify for, you must be able to afford your payments. Remember to look at the frequency in addition to the payment amount. It’s common for point of sale loans to be due every two weeks, so your monthly payment may actually be double what you expect.
Those who won’t return the purchase
Make things easy on yourself and only use a point of sale loan on products you’re confident you’ll keep. That way you don’t have to worry about the return policy, prepayment penalties, and other potential headaches. Save that order of six pairs of jeans to try on for a different time.
Who should avoid them
There are some cases when you might be better off without a point of sale loan. Here are some examples.
Those who can only get high-interest rates
Larger purchases and a below-average credit score could land you a higher interest rate. Compare your offer with other options, like your credit card APR. Or consider skipping the purchase altogether if you can’t pay in full.
Those on a tight budget
You could put yourself in a financially precarious situation by adding an extra monthly payment to your budget. Consider your savings buffer in place — if you don’t have an emergency fund yet, you shouldn’t add more debt to your plate.
Those who frequently miss bill due dates
It’s important to pay all of your bills on time, especially since that’s the biggest contributing factor to your credit score. If you haven’t yet mastered the art of making your payments on time, figure that out before you take out a point of sale loan. Otherwise, you could quickly amass expensive late fees.
Best time to use a point of sale loan
A point of sale loan could help you better afford a major purchase, especially if you can land a low rate. It may also be a good idea to use a POS loan instead of a credit card because you’ll have fixed payments and a set amount of interest you’ll pay.
With a credit card, you may be more likely to just make minimum payments and ultimately pay more in interest regardless of what your APR may be.
While a point of sale loan is good in some situations, it’s not the only financing option to consider.
A credit card could come with a potentially lower APR than a point of sale loan. You may also have more flexibility in the size of your balance rather than being limited by the allowable limit of your POS loan.
Additionally, it could be easier to track a single credit card balance rather than managing multiple “pay later” accounts with different vendors.
For large purchases, a personal loan could provide you with substantially lower interest rates with payments spread out over a more manageable period of time.
The application process may be more intensive, but you’ll find approvals with online lenders are just as fast as a POS loan. Plus, you can usually get funds delivered to your account within a single business day, if not sooner.
You can find a bunch of personalized personal loan offers through personal loan aggregators like Monevo and Fiona.
A point of sale loan may be helpful in certain situations, especially if you can avoid paying interest altogether. Just be strategic with how you use this financing option rather than giving in to temptation every time you see a “pay later” option. That way, you’ll be in control of your money rather than feeling overwhelmed by multiple loan balances.