What is Point-of-Sale Financing and Is It a Good Idea?

Now more than ever, consumers expect to have financing options to help them make large purchases that fit their monthly budget. A point-of-sale loan, also known as “Buy Now, Pay Later” financing, is the latest trend offered on retail websites. They’re touted as a better financing alternative to high-interest credit cards.

But they can have some downsides. If you miss a payment, like a third of consumers who use POS loans, your credit can suffer.^[1] And even the Consumer Financial Protection Bureau (CFPB) warns that these services don’t offer the same protections you get with other types of credit. So, before you click on the flashing “Buy Now, Pay Later” button at checkout, let’s look at how point-of-sale financing works and if it’s all that it’s cracked up to be.

What is point-of-sale financing?

Point-of-sale (POS) loans are a financing option offered at checkout when consumers shop online. It allows consumers to make purchases with incremental payments. Nowadays, retailers often partner with third-party lenders, such as Afterpay or PayPal, to provide customers with “Buy Now, Pay Later” (BNPL) lending services at checkout.

POS financing lets you break down a purchase into smaller installments, so you buy now and pay later.

In some instances, customers must apply for a one-time installment loan at checkout that will break their purchase into four small payments. The good news is that in most cases, you will be instantly approved unless you’ve had trouble repaying a BNPL loan in the past.

Otherwise, you will sign up with a payment platform that partners with that retailer. Then you will choose a payment plan that fits your budget.

Typically, point-of-sale loans have less stringent eligibility requirements than traditional loans, and often lenders offer no interest on POS financing. However POS loans are not always the best option for consumers. Customers often fall into overspending traps because they view the installment payments as less hindering than making a large one-time payment.

How does point-of-sale financing work?

Instead of paying a large lump sum, you make small incremental payments to pay off a purchase. Because each company has unique terms and conditions, not all BNPL programs operate the same way. POS installment loans generally break payments down into four interest-free installments, but they do so in slightly different ways.

Here’s how BNPL works in general:

1. You start by making a purchase at a participating retailer. At checkout, you opt for Buy Now, Pay Later.
2. Once approved, you make a small down payment that is generally 25% of the total purchase price.
3. From there, you pay off the remaining balance over a series of interest-free installments.
4. Payments can be made manually by check or bank transfer. Otherwise, they can be put on automatic deductions via credit or debit cards.

POS financing vs credit cards

Now you may be thinking, how is that any different from just paying off a credit card? While BNPLs and credit cards both allow you to pay for purchases over time, they have a few differences.

When you use a credit card, you’re required to make minimum payments each month. Interest accrues on the balance until you pay it off. Credit cards also allow you to carry a balance for an indefinite period.

By comparison, POS loans usually do not charge interest or additional fees. However, unlike credit cards, POS financing has a fixed payment schedule. Generally, the payment lasts anywhere from a few weeks to a few months. You are also given a set amount you must repay with each payment, usually 25% of the total price.

The advantages and disadvantages of point-of-sale financing

The upside of using POS loans is the ability to make purchases and pay for them over time without any interest charges. It also doesn’t hurt that you can get approval for these financing options even with bad credit.

Usually, they don’t affect your credit score because BNPL loan terms are considered “too brief” to be reported to the credit bureaus. So, you can apply for a BNPL service without dinging your credit with a credit inquiry.

On the other hand, they won’t help you build credit because most BNPLs don’t report on-time payments to the credit bureaus. They only report late payments—more on this soon.

Oh, and did we mention how they don’t add to your credit card debt? Of course, that’s only true if you’re not using a credit card to make your BNPL installment payments. If you do, then you’re still adding to your credit card debt, and you could face interest charges on purchases that are supposed to be interest-free.

Returning items can also be a pain because there can be a disconnect between the merchant and the POS lender. If you decide to return an item, you may end up waiting longer for your refund. Why? Because lenders will wait for the outstanding payments to be settled before working out a refund.

So, that means you could be forced to make your payments until the full purchase is paid off, then get your refund.

Does POS financing affect my credit score?

Depending on your POS loan provider, your credit score may be impacted. Some POS loan providers, like Klarna and Affirm, will report to the credit bureaus. However, they will only do it for certain types of POS loans. For example, Affirm does not report loans with 0% APR and four biweekly installments or three-month payment terms. But for other loans, Affirm says they will report your payment history to Experian. And while most POS lenders don’t report on-time payments that would help you build a positive payment history, they will report late payments. So, POS financing doesn’t help you build credit, but it can hurt your credit if you don’t keep up with the payments.

Consider this: A 2021 Credit Karma survey found that 34% of POS loan users had missed at least one installment payment. Of those who missed a payment, nearly three-quarters said their credit scores were negatively affected.

If you are repeatedly taking out multiple POS loans that get reported to the credit bureaus, your credit score may also decrease. Since the length of credit history accounts for 15% of your FICO score, the more loans you take out the lower the average age of your accounts.

For example, say you are trying to take advantage of the 0% financing offers from Affirm. Assume you do so ten times. Those ten new POS loans could drop your credit age significantly. Regardless of how small or large the loans are, each loan will count as a separate account on your Experian credit report and drag it down.

Instead, consider POS loans that do not require credit checks and do not report to any of the credit bureaus, like AfterPay. Klarna also does not report information to the credit bureaus on their POS loans. They will, however, perform a soft credit check if you opt for their “Pay in 4” or “Pay in 30 days” loan. But soft checks do not hurt your credit score. However, if you apply for a branded open line of credit offered by Klarna’s partner bank, a hard inquiry will most likely take place.

But if you miss payments or default on your account, your credit score will suffer.

So, before you decide on taking out a POS loan, make sure you are clear on the terms and conditions of your agreement. Make sure you understand:

1. If there’s a credit check when you apply, and if the inquiry is hard or soft.
2. If the POS lender reports any information to the credit bureaus.
3. How payment history will be reported, especially when it comes to late payments.

Considerations for POS loans

Before you sign up for a BNPL loan, you need to carefully consider if the loan is the right choice for you and your budget.

1. Can you afford the payments?

Start by figuring out how much money you can afford to spend from your paycheck. It’s not a matter of “I can afford this item because it’s broken down into installments.” Instead, it’s a matter of how much of your biweekly pay you can use to cover POS loan payments. The last thing you want is to be digging in the couch cushions for spare change to make ends meet. Avoid the BNPL loan entirely if it doesn’t fit into your budget.

2. How will you pay?

As with any loan or credit application, you need to think about how you will pay a POS loan back. While POS loans give you options, including charging the payments to a credit card, you should always opt for cash payment options.

If you’re linking up your bank account for an automatic transfer or paying with a debit card, make sure you have funds available. Otherwise, you’ll get popped with overdrafts.

It’s not advisable to use a credit card to make POS loan payments because you’ll end up paying the costs you were trying to avoid. You’ll have interest charges from your credit card applied to your interest-free POS loan. And the costs will end up being much higher.

For example, if you make a $200 purchase using a BNPL loan and you use your credit card with 19% APR to make payments, you’ll accrue interest as you pay off the balance. if you take three months to pay off the credit card balance, it would add up to $38 in interest on the $200 purchase.

3. Will the payments fall close to other bills you need to pay?

Another point to consider is whether you’ll be short for cash when your other bills come into play. You don’t want to choose between a POS loan payment and your electric bill.

So, before you rationalize your latest purchase, make sure your income can stretch to cover your recurring bills. Otherwise, consider using a BNPL service like Sezzle, which allows you to reschedule payments by up to two weeks. The first reschedule is free and then each additional reschedule is $5

4. Does the BNPL service report to the credit bureaus? If so, when?

“Buy Now, Pay Later” loans may or may not be reported to the credit bureaus. It depends on the lender. That’s why it’s important to read the fine print and make sure you understand what you’re getting into. Some POS lenders don’t report good behavior, but they will report delinquent behavior.

5. Is this the only BNPL payment you’re making or are you stacking multiple payments?

Though it may not feel like a loan, know that “Buy Now, Pay Later” financing creates new debt obligations. Because some lenders don’t report to the credit bureaus, consumers can be tempted to overuse POS loans.

You may feel like you can borrow repeatedly and take advantage of those sweet interest-free deals. But too many deals are likely to stress your budget and lead to missed payments.

This is especially risky during major shopping seasons, like the holidays or back to school. If you take out multiple POS loans at once, you may not be able to keep up with the payments.

Should I use a POS loan?

With more retailers offering point-of-sale financing, shoppers are jumping at the opportunity to make purchases with incremental payments that won’t blow their budgets. But, is it actually a good option or is it just more cause for temptation?

If you’re planning a large, one-time purchase, like a mattress or bed frame, and you don’t want to accrue interest on a credit card, POS financing may be for you. But make sure to read the fine print as some lenders, like Affirm and Klarna, charge interest rates of up to 25-30% with some loans!

If you’re in college and have yet to establish a credit history, the fact that some lenders don’t require credit checks can play right into your hands. Perpay, for example, will use your paystubs when deciding on credit limits. Just make sure you can afford the terms of your agreement.

Some lenders will automatically disclose the payment amount for each item and when they are due. While other lenders, like Klarna, require you to choose a payment term (1-36 months).

if you’re worried that you may have trouble making the payments, seek out lenders like Sezzle. They allow you to reschedule your payments by up to two weeks—once for free and then for $5 anytime thereafter.

Alternatives to POS loans

Buy Now, Pay Later payment plans can be a very useful method of purchasing. If the plan offers no interest and lets you take your item home, then it may be a handy alternative to credit cards. But if your focus is to build credit, it may be best to look elsewhere.

A smart alternative may be a secured credit card. A secured credit card requires a cash deposit that becomes your credit limit. So, say you deposit $500. That $500 deposit will become your spending limit. If you default, the lender can take the deposit as collateral. If you build your credit this way, you may upgrade to an unsecured card and get your deposit back in the process.

Alternatively, you may want to consider applying for a small loan to help improve your credit score. The best way to go about it is to simply apply for a small personal loan and repay it in a way that works for your budget. This can be a useful way to build credit at the same time that you get through an expensive period, like the holidays or when you’re redecorating your house or apartment. You get the funds you need, avoid the high-interest charges or credit cards, and can build your credit.