Online Purchase Financing: What is it?

Buy now, pay later—no credit card required. Online loan companies like Klarna, Afterpay and Affirm have made financing options available for customers, but is the offer too good to be true? Here’s what you need to know about online personal loans before you take one out.

Short-term loans offer an alternative payment option to credit
For customers that want to buy something today and put off the bill until later, credit cards have long been the answer. But point-of-sale financing provides an alternative to credit cards.

When you place an order from certain online retailers, you’ll see an option on the checkout screen to pay with a point-of-sale loan, such as Afterpay. The loan provider will perform a quick credit check, and if you’re approved, you’ll receive a loan that you can repay in installments, according to CNN.

Unlike a credit card, these loans are generally meant for one-time purchases, and they’re only available from specific retailers.

Different loans come with different interest rates
Each loan comes with different interest rates, terms and conditions. Some companies offer low promotional interest rates, and loan repayment plans vary across providers—you may be expected to make payments on a monthly or quarterly basis, for example. If you’re considering taking out an online loan, it pays to shop around for the best deal and understand monthly financing vs. quarterly financing options.

But even if you’re approved for a loan, beware: Some loans advertise promotional interest free payments, but if you don’t make payments on time within the repayment window, you could get hit with steep deferred interest fees, according to CNBC.

Point-of-sale loans are worthwhile for some shoppers, but proceed with caution
If you qualify for a 0%-interest loan and you’re confident that you can pay it back within the repayment period to take advantage of interest free installments, online loans could be a good alternative to paying with a credit card—especially for big-ticket purchases when you don’t have the money to pay your bill in full right away.

But online loans have many of the same pitfalls as credit cards, including high interest rates, fees and penalties. Make sure you know what you’re getting into before you’re tempted by an alluring offer.

Consumer Reports warns that returns can also be tricky if you pay with a loan, and these types of loans may encourage you to spend more than you can truly afford—just like credit cards.