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Loans

What is a point-of-sale loan and are they worth it?

CNBC Select explains what point-of-sale financing is and what to consider before you choose "pay over time" at check out.

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Online shopping has become a popular way to purchase just about everything, from clothing to furniture, electronics to wellness products and almost anything else you can think of — especially over the past few months as the coronavirus pandemic has kept many Americans at home.

And if you're one of the millions who've been shopping more online lately, you've probably noticed a small logo near the payment information at checkout offering the option to "buy now, pay later" or apply for a monthly payment plan.

These options are called point-of-sale loans, or POS loans, and they seem to be sprouting up everywhere. Companies like AfterpayAffirm and Klarna offer low- or no-interest financing for purchases, which could help you if you need extra time to pay.

But like any loan, POS loans come with terms and conditions that you want to be aware of before you sign up. Ahead, CNBC Select explains what to consider if you want to sign up for a POS loan the next time you make a bigger purchase.

What is point-of-sale financing?

POS financing is a broad term that describes methods for giving shoppers flexible, pay-over-time installment options. In some cases, shoppers apply for a one-time installment loan at checkout to help break their purchases up into smaller monthly payments. In other cases, a consumer might sign up for payment platform that partners with specific retailers and gives the option to choose a payment plan when they check out.

With Klarna, for instance, customers link their debit card to the app and pay in bi-weekly installments with the option for 0% interest over four payments. Klarna partners with stores like Sephora, Adidas, H&M and lots more.

Installment financing is considered a type of unsecured loan, and in the past, it's typically been used when consumers want to buy a big-ticket item, such as furniture, electronics, jewelry, etc. But these days the "buy now pay later" option is showing up in nearly every sector, from clothing to housewares and cosmetics — even on Etsy. POS loans are also growing in the travel sector, with numerous airlines letting you book now and pay over time with an installment plan.

What to think about before you apply

Without a doubt, POS financing is convenient when you don't have the cash up front. But as with all lending products that could potentially impact your credit score and your overall finances, be mindful when you apply.

Here are some things to consider:

1. The impact on your credit

POS loans may or may not require a hard credit inquiry. When you apply, read the fine print to see if the company is going to pull your information from the credit bureaus, which could impact your credit score. Affirm, for instance, only performs a soft credit check.

Also, do your research to see if the company reports to the credit bureaus, which could positively impact your credit after you make regular on-time payments, or harm your score if you fail to pay. Larger companies, like Affirm likely will report your activity to the credit bureaus. Klarna may report negative actions, such as failure to pay, but not always report everything.

2. Monthly payment

Ask yourself whether you can comfortably afford the monthly payment for the lifetime of the loan. A $500 purchase might cost you $50 per month, but consider whether you really want to be on the hook for 10 months until you pay it off. This decision may vary by item; $50 per month for a new mattress could feel like a great deal, whereas $50 per month for new shoes you didn't really need might hit differently. Which brings us to our next point...

3. Returns

If you decide to return the item, find out what the return policy is before you finance a loan to pay for something. If there are shipping and/or restocking costs, or if you're denied a full refund, you might get stuck paying back some or all of the loan. Also check to see if there is a penalty for paying off the loan early, which you'll have to do if you end up sending the financed item back.

4. APR

Does the loan come with 0% APR financing when you pay in a fixed number of installments?  If not, calculate how much the interest will cost you over time. If the APR is too high, you may be better off using cash or a rewards credit card (as long as you plan on paying it off within one billing cycle). You should also look into what happens if you miss a payment, or fall behind in general. Some POS loans can come with very high fees if you miss a payment.

An alternative option: 0% APR credit cards

Point-of-sale financing might be great for some consumers, but a 0% APR credit card can provide the same flexibility, but with additional rewards.

For instance, many of the best 0% APR cards have welcome bonuses for signing up and meeting certain minimum spend requirements. The Wells Fargo Cash Wise Visa® card, for example, rewards new cardmembers with a $150 cash rewards bonus after you spend $500 in the first three months and offers 0% intro APR for the first 15 months from account opening on qualifying balance transfers and purchases (then 14.49% to 24.99% variable APR).

The best 0% APR cards offer 15-,18- and 20-month long 0% APR periods. For example, the U.S. Bank Visa® Platinum Card offers 0% for the first 20 billing cycles on balance transfers and purchases, then a 14.49% - 24.49% variable APR applies. Balances must be transferred within 60 days from account opening.

With the right credit card, you can earn rewards on your big purchases as well take advantage of generous financing. You usually have to have good or excellent credit to get approved for the best 0% APR offers.

Wells Fargo Cash Wise Visa® card

  • Rewards

    1.5% cash rewards on purchases

  • Welcome bonus

    $150 cash rewards bonus after you spend $500 on purchases in your first 3 months from account opening

  • Annual fee

    $0

  • Intro APR

    0% for the first 15 months from account opening on purchases and qualifying balance transfers

  • Regular APR

    14.49% to 24.99% variable on purchases and balance transfers

  • Balance transfer fee

    Introductory fee of 3% ($5 minimum) for 120 days from account opening, then up to 5% ($5 minimum)

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

See our methodology, terms apply.

Pros

  • No annual fee
  • Use your Wells Fargo Debit or ATM card to redeem rewards for cash at Wells Fargo ATMs ($20 increments)
  • Generous welcome bonus

Cons

  • Below average 1.5% cash back
  • 3% fee charged on foreign transactions
  • Estimated rewards earned after 1 year: $482
  • Estimated rewards earned after 5 years: $1,809

Rewards totals incorporate the cash back earned from the welcome bonus and assumes you use eligible mobile wallets for 75% of purchases your first year.

U.S. Bank Visa® Platinum Card

On U.S. Bank's secure site
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0*

  • Intro APR

    0% for the first 20 billing cycles on balance transfers and purchases*

  • Regular APR

    14.49% - 24.49% (variable)*

  • Balance transfer fee

    Either 3% of the amount of each transfer or $5 minimum, whichever is greater

  • Foreign transaction fee

    2% to 3%

  • Credit needed

    Excellent/Good

*See rates and fees. Terms apply.

Need 0% financing? Here are the best 0% APR credit cards: Finance debt or new purchases interest-free for up to 21 months

Information about the Wells Fargo Cash Wise Visa® card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.