As a generation still scarred by the Great Recession of 2008 and burdened with paying back an unprecedented amount of student loans, it's no surprise millennials aren't looking to add to their debt loads. This fear is partly why millennials carry fewer credit cards than their Generation X peers did at the same age. The downside of opting out of credit cards? Losing the flexibility and rewards that credit cards offer its users.
New fintech companies have emerged to help provide a form of payment at least as old as the Great Depression: layaway. Although these companies usually shy away from calling the service "layaway," the concept marketed by some of the more popular companies such as Affirm, Afterpay and QuadPay remains largely the same. Over time, the customer pays for purchases in regular installments instead of all at once. It's a deal proving particularly attractive to those millennials (and younger users) without credit cards. "80% of QuadPay customers are aged 18-36," said Ian Yamey, chief technology officer of QuadPay, an installment payment company with nearly 300,000 customers. "And 70% of our users are paying with debit cards."
How do installment payment services work?
Customers shopping with a participating merchant can pay via their provider of choice by clicking the company's icon when checking out and then using a debit card. The service will buy the product from the merchant for you and then immediately charge your card its first payment. The payment will depend on the service you use. QuadPay and Afterpay split the cost into four even payments and will charge you 25% of the item's price upfront. So if you buy a $100 lamp with either service, you'll pay $25 at the time of purchase with the remaining $75 spaced out once every two weeks. Through Affirm, customers will have to pay interest with most merchants, but they'll have more leeway in choosing payment schedules that can stretch out for months. QuadPay and Afterpay don't charge interest.
The remaining payments are automatic and won't incur service fees, so long as you have enough money on your debit card to meet your financial obligations. If not, most of the companies charge a series of late fees. QuadPay, for example, fines customers $7 for payments more than one week late, plus another $7 if you're two weeks late. If you don't pay the remaining installments, your outstanding balance is subject to the same treatment as any other unpaid debt. That could mean calls from collection agencies, a hit to your credit score and possible legal action if you refuse to pay up.
As a way to minimize risk, these companies can refuse service to customers who don't meet standards. Each purchase request is analyzed and then approved or denied. Generally, these companies like to confirm you have a history of making on-time payments, but there's no guarantee you'll be approved for every request.
|Company||Minimum Spend||How Often You Pay||Late Fees|
|Affirm||None, although the item's price affects how long you'll have to pay back Affirm||Monthly over the course of three to 12 months, depending on the individual purchase.||None, but you'll have to pay interest on the majority of items, ranging from 10% to 30% APR.|
|Afterpay||$35||The cost of the item is split into four even installments. The first payment is due at time of purchase and the rest are due every two weeks.||$8 if you are one to six days late, and an additional $8 if you're another week late.|
|QuadPay||None||After paying 25% of the item's cost at the time of purchase, you'll pay the remainder in three more installments every two weeks.||$7 if you're one week late with your payment and another $7 if you're two weeks late.|
Are installment payments a better deal than credit cards?
Many of these installment plans don't charge a service fee or interest, which means people averse to credit cards enjoy some of the freedoms credit card users take for granted, specifically the ability to buy something today and (mostly) pay for it tomorrow. But Jason Kirsch, founder of the millennial-focused financial-planning site Grow, points out these services are just another form of credit and can be abused just as easily as a credit card. "For consumer purposes, I think credit cards should always be someone's primary source of credit because we're so used to them and they're ingrained in almost every aspect of our financial lives," he said. "There's a general understanding that you can't keep a credit card balance for too long or else you'll be in trouble. People may not consider layaway, especially because of marketing (by installment payment companies), as risky." One scenario where Kirsch feels paying by installment plan makes the most sense is when the customer knows some money is heading his or her way, such as a tax return or holiday bonus, but needs to immediately make a purchase.
Both he and QuadPay's Yamey view these services as a supplement, not as a replacement to credit cards. "We see ourselves as a flexible payment alternative," Yamey said. "We're not specifically going after credit cards, but QuadPay gives people without them the ability to space out payments without going into debt, paying interest or getting hit by unknown charges."