How online loans like Affirm and Afterpay really work—and should you ever use them

A shopper looks through clothes on her iPad device.
Source: Twenty/20

After the birth of her son, Lauren Hynds wanted a way to work out that would be easy enough to manage while caring for a newborn. That's when she saw ads for Peloton, the workout bike with the cult following. A talk with a few friends who raved about their bikes and some online research convinced her and her husband to buy one of their own.

But Peloton bikes start at $2,245, including delivery and set up, and that wasn't something that Hynds and her husband could afford at the time. Then they learned that Peloton offers low-interest financing through the financial technology company Affirm.

"My husband and I decided to finance because we couldn't comfortably swing the full purchase price up front, and our credit is good enough that we assumed we'd qualify for 0% interest, which we did," Hynds tells CNBC Make It. "The financing option made the purchase a no-brainer."

Called point-of-sale loans, these financing options allow customers to buy products online now and pay later, typically over monthly installments. These loans aren't new, but recently they have been spreading to more and more retailer websites, where they're touted as lower-interest alternatives to credit cards. And indeed, that was what appealed to Hynds.

But not every customer qualifies for 0% loans from companies like Affirm, Afterpay and Klarna, and consumer advocates urge caution before applying.

How point-of-sale loans work

Each loan company is different, but typically, you'll apply for the financing option online when you check out and be approved or denied almost instantaneously.

Afterpay — which is used by popular retailers including Anthropologie, Forever 21, Tarte Cosmetics, Reformation, Levi's, Nasty Gal, Urban Outfitters and more — says that it does not charge interest or any other fees if customers pay on time. You pay for your purchase biweekly. A $130 Anthropologie dress, for example, can be paid for in four $32.50-installments.

Afterpay does not run a credit check, and only charges a fee, of $8, if a customer misses a payment. If you continue to miss payments, fees are capped at 25% of the purchase price, and you are unable to use Afterpay again until your account is in good standing.

With Affirm, which is used by retailers like Peloton, Warby Parker, Casper and Wayfair, you make monthly payments for three, six or 12 months, or sometimes longer, depending on the retailer. (Peloton's payment schedule is $58 a month for 39 months for the most basic package.) About one-third of all Affirm loans are taken out at 0%, the company confirmed to CNBC Make It, and interest rates can run up to 30%.

Klarna, used by Ikea, Zara and H&M, lets consumers pay in full at a later date, pay monthly installments or make four biweekly payments. It charges late payment fees of up to $10, per CR, and up to 19.99% interest on purchases.

Order limits can vary: Afterpay, for example, says its loans can be used on orders of $35 to $1,000, while Klarna determines a limit based on an applicant's credit profile, as does Affirm.

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The companies allow users to set up automatic payments and send notifications when the payments are coming due. Hynds said she set up auto pay and receives a text message a day or two before each month's payment, which gives her peace of mind.

"The payment process has been seamless," she says. "If Affirm is available for any future larger purchases, I would certainly consider using them again, because the whole experience was quick and painless."

Always read the fine print

The process isn't always so easy, as Consumer Reports detailed. Dana Marineau, VP and financial advocate at Credit Karma, tells CNBC Make It that consumers should review their budgets before adding another expense and sleep on a big purchase before pulling the trigger.

"If you agree to take out a [point-of-sale] loan, you're borrowing money that you will one day have to pay back," says Marineau. "Ask yourself if you can afford to take on more debt before signing yourself up for a payment plan that could negatively impact your bottom line."

In some ways these options may be better than a credit card because the payments are fixed. But the potential downfall is that you might not have the same rights if something goes wrong.
Lauren Saunders
National Consumer Law Center

Always read the fine print, particularly as it relates to fees and interest, Lauren Saunders, associate director of the National Consumer Law Center, tells CNBC Make It. These terms vary depending on the retailer and the loan provider it uses.

"It's important to know not just what the monthly payment is, but what the interest rate and any other fees and charges are, and compare it to other options," says Saunders. Make sure you know what the consequences will be if you miss a payment and plan ahead for the worst-case scenario.

You'll also want to make sure you know each retailer's policy for returns or reimbursement. Under federal law you have chargeback rights with credit card purchases, meaning if you receive something that is defective or not as advertised, you can get reimbursed. But that's not the case for these financing options.

"In some ways these options may be better than a credit card because the payments are fixed," says Saunders. "But the potential downfall is that you might not have the same rights if something goes wrong."

When is a loan preferable to using a credit card?

As Hynds noted, a 0% installment loan can be helpful if you're planning to make a large purchase but don't have enough money to pay off your balance immediately. It might be a better option than racking up debt on a credit card, the average interest rate of which is currently 17.73%, according to But only if you qualify for a low rate.

If you assess your budget and determine you can afford the payments, then you've locked yourself into a set schedule for repayment, rather than taking on revolving debt. That will save you in the long term.

One factor to watch out for, depending on the loan company: Deferred interest, which means that if you don't pay off your entire loan within the agreed upon 0%-repayment period, extra interest will be added to your balance. And that could set you back hundreds of dollars, depending on the interest rate.

Hynds said Affirm performed a soft credit check to see if she qualified for the 0% loan. That didn't impact her credit, but it's important to remember that if you miss a loan payment, your credit score can take a hit just like if you missed any other bill.

"While they may seem like a more convenient or sometimes safer option than credit cards, at the end of the day, these loans often get reported to credit bureaus," Adrian Nazari, founder and CEO of Credit Sesame, tells CNBC Make It. "When consumers do not exercise caution to obtain these loans, it could end up being detrimental to their overall credit health."

To avoid all the headaches, the best option is to save enough money to pay for your products outright.

"It's always safer to just pay it in full, either using your debit card or if you pay off your credit card each month," says Saunders.

Correction 6/7/2019: This article has been updated to reflect that Afterpay does not charge interest and to clarify its fee structure.

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