Many stores and online shops now offer the option to buy now and pay later — also called an “installment credit” or “pay over time” plan.
How buy now, pay later plans work
Here’s what to know if you choose this option at checkout to pay for an item:
- The plan might require a credit check, but some plans might offer no credit checks.
- You pay part of the cost now and get the item.
- The money goes to the company that manages the plan.
- That company pays the store in full.
- You make regular payments to the company that manages the plan. Usually, you pay with a credit or debit card over a few weeks or months until you pay off the purchase in full. You don’t pay the store.
Many buy now, pay later plans advertise no-interest payments and few or no fees — but most plans do charge some fees (sometimes high ones). For example, fees for each payment, for paying late, or for changing your payment date. Many plans emphasize that you don’t pay the full cost upfront — but you might have to pay the item off in a matter of weeks. And, depending on how you set up your payments, you could be charged other fees. For example, if you sign up for autopay with your debit card, you could get hit with overdraft fees if you don’t have enough money in your account when payments come out. If you use your credit card, make sure the payment won’t tip you over your credit limit.
The companies that manage these plans might report your payments to the three nationwide credit bureaus — Equifax, Experian, and TransUnion. That could hurt your credit if you miss a payment or pay late. On the flip side, making payments on time might help your credit.
Some stores offer rent-to-own or lease-to-own plans for more expensive items like furniture or electronics. If you choose one of these plans, you’ll sign a contract agreeing to make regular weekly or monthly payments, either to the store or an outside company, and then you get to take the item home.
How rent-to-own and lease-to-own plans work
- You might get to choose the length of the contract term.
- A longer contract term means you’ll pay less each month, but in the end you’ll pay more in total through price markups and fees.
- A shorter contract term means you’ll pay more each month, but in the end you’ll pay less in total than with a longer contract.
- The plan might check your credit, or it might offer no credit checks. Some plans report your payments to the credit bureaus, but others don’t.
- The automatic payments (including fees and interest) you set up with your debit card, credit card, or bank account happen like clockwork — even if you don’t have enough money in your account on the due date or you’ve reached your credit limit.
- If you change your mind about the item, you might have the choice to return it to the store and stop making payments. But you probably won’t get back the money you already paid.
- If you miss a payment, you might lose both the item and all the money you paid toward it.
Stores that offer rent-to-own or lease-to-own plans often promote what they think are benefits: choice of different repayment periods, no credit check, automatic withdrawals, and fast approval. But that convenience — for example, getting to use a washing machine while you’re paying it off — can mean you pay twice what you’d pay in cash.
A layaway plan lets you put an item on hold while you pay for it over time.
How layaway plans work
Here’s what to know if you choose a layaway plan to pay for an item:
- You put down a deposit — plus any fees the store charges (which may include storage costs).
- You have a short period of time, often 30 days, to pay the rest of the cost.
- After you pay in full, you get the item.
The checkout line or online shopping cart might be the first time you see offers for buy now, pay later, rent-to-own, lease-to-own, or layaway plans. They might seem like quick and easy ways to pay, but they all can come with unexpected costs and potentially affect your credit. If you feel pressured into signing up for a plan when you’re checking out, slow down. Ask some questions or do some research online to understand what you’re getting into.
What will I pay with interest and fees? Depending on the payment plan, you might pay a little — or a lot — more. With some rent-to-own and lease-to-own plans, you might pay twice as much as you would if you paid with cash. If you wait a few months, could you save up enough to pay the full cost instead of using a payment plan (and paying more over time)?
What happens “if”? What happens if things don’t go as planned? What if you pay late or miss a payment? Will you lose the item or will it hurt your credit? If an item you’re renting or leasing is repossessed, is there a way to get it back (and will it cost you more)?
What’s the plan’s refund policy? What happens if you’re still making payments on an item and then decide you don’t want it? Will they give you your money back? Will they charge you any fees?
What’s written in the contract? For example, does the contract for a rent-to-own or lease-to-own plan explain who pays for repairs if the item breaks? Did a salesperson make promises? Are those promises written in the contract? Always get a copy of the contract and keep good records of the payments you make.
What are other people saying? Find out about the reputations of the store or online shop and the plan, especially when it comes to returns and disputes. Search online for the store name, the name of the plan, and “complaint.” When it comes to disputes, know that these plans also typically offer fewer protections. Even if you use a credit card to make payments to the plan, those protections might not extend to the original purchase.
Most states have specific laws that apply to rent-to-own, lease-to-own, and layaway plans. Some states also have consumer credit laws that apply to buy now, pay later plans. Check with your state attorney general or state and local consumer protection for more information about your rights when you use these plans.
If you have a bad experience with a business when you’re using a buy now, pay later, rent-to-own, lease-to-own, or layaway plan, tell the FTC at ReportFraud.ftc.gov.