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What experts say you need to know about 'Buy Now, Pay Later' programs

While consumers can use 'Buy Now, Pay Later' programs on almost any purchase, experts say the convenience can also be risky.

WASHINGTON — Retailers are phasing out layaway programs as stores like Target, Macy’s, GameStop and Walmart offer customers an alternative called “Buy Now, Pay Later.”

As the holiday season nears, "Buy Now, Pay Later” is becoming more popular, and experts say it’s like layaway, but with some potential financial pitfalls.

"It's more than what the old layaway used to be because the old-fashioned layaway was very limited in terms of the types of products that it was associated with," Bruce McClary, Senior Vice President of Membership and Communications at the National Foundation for Credit Counseling, explained. "Buy Now, Pay Later is attached to almost anything that can be sold. It's much more flexible because it merges fintech with that old-fashioned concept of layaway." 

In 2019, Walmart ended its in-store layaway program altogether and instead promoted its existing “Buy Now, Pay Later” option with Affirm

RELATED: Need help paying for holiday gifts? The Affirm app may just be the best option

A spokesperson for Walmart said, “Last holiday season, we removed seasonal layaway from most of our stores with the exception of select jewelry items at select stores, and based on what we learned, we are confident that our payment options provide the right solutions for our customers.”

For Walmart purchases between $144 and $2000, customers can receive their item up front and make payments in installments. It's a reversal from the delayed-gratification structure of its predecessor program.  According to their website, Affirm does not charge any late fees, prepayment fees, annual fees or service fees to open or close your account.

Paying with Affirm and other loan services can be convenient, but experts say it can be financially risky.

One reason is that the instant gratification and perceived affordability of products purchased with the “Buy Now, Pay Later” format may encourage overspending.

RELATED: St. Louis area shoppers react to Walmart ending seasonal layaway plan

"It gets risky if you're someone who has bad credit and you're trying to borrow and you haven't really resolved the issues that caused you to end up with bad credit because it could make your situation a little bit worse," said McClary.

Prince Owusu Mensah, a Certified Financial Planner with Ameriprise Financial Service, LLC, agrees the programs can be misleading.

“What they do with these 'Buy Now, Pay Laters' is they say zero interest. Zero percent interest and that takes away the negative of credit cards. So, what it does is creates the illusion of affordability. You are prone to spend more when you are not releasing the money right then and there,” said Mensah.

According to Walmart’s website, APR rates are determined by the customer’s credit score and can range from 10-30%. Experts emphasize each retailer is different and customers should read the fine print before using a loan service like Affirm.

“If you take advantage of multiple 'Buy Now, Pay Later' deals over a short period of time, they may each show up on your credit report in separate accounts and taking on a lot of accounts at one time can also have a negative impact on your credit score,” said McClary.

As we inch closer and closer to the holiday season, retailers will be offering several different payment options so do your research to find the best option for you.

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