Expert Explains Possible Dangers Of 'Buy Now, Pay Later' Plans

PITTSBURGH (KDKA) -- During the coronavirus pandemic, consumers have been searching for ways to save on spending, leaving companies scrambling to generate sales.

Some companies are luring shoppers to their websites with "buy now, pay later" plans.

When the top beauty brands release a new collection, DeAnna Lindauer of Rankin logs onto her device, whips out her wallet and pays for the latest makeup trends. She shops with retailers offering buy now, pay later options through companies like Afterpay, Klarna and Quadpay.

These companies allow consumers to pay in installments, typically in four equal payments, with zero percent interest and no credit checks. This way to spend has become the layaway of 2020.

"They're definitely a saving grace," she said. "I don't have any credit cards right now. So that's perfect for me, especially with it being Christmas time."

But how do companies offering these services generate a profit? Duquesne University marketing professor Dr. Audrey Guskey told KDKA that Afterpay pocketed more than $179 million last year through partnerships with retailers.

"The retailers end up spending 30 cents for every transaction they pay to the Afterpay. And then they get four to seven percent of the total purchase price," said Dr. Guskey.

But these companies are also making money off people who can't make their payments. Some sites can charge up to 25 percent of the purchase price in late fees. And Dr. Guskey said these companies are targeting the perfect audience.

"Sixty-seven percent of their customers or subscribers are millennials — 18 to 34. They're going after students and part-time workers, people whose income levels are not secure," said Dr. Guskey.

Does using the services damage your credit line? Dr. Guskey said there is no direct impact. However, if consumers continually fail to make payments, there could be interest down the line.

"They're going to toss it off to a credit loan company and they're going to go after you and that's when your credit line is going to hurt. They say they'll work with you if you have financial problems, but I don't know how solid that is," said Dr. Guskey

Some people are also paying installments with credit cards, which could potentially have an adverse impact on credit scores. You may also face issues receiving your money back in a timely manner when making returns through these companies, Dr. Guskey said.