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“Will it be cash, credit card, or personal loan?”

The next time you shop online, you may be offered a new payment method: a personal loan with fixed monthly payments. Instead of using cash or plastic at the checkout, you would provide personal information and get a loan in minutes.

Got an eye on a new living room set at Wayfair? Or maybe you book your honeymoon on Expedia. Increasingly, buyers of these and other sites are faced with payment options from third-party loan companies like Affirm, Bread, Klarna, and Acima Credit.

Currently, these “point-of-sale” loans mostly appear on websites for large purchases, such as mattresses, furniture, electronics, or musical instruments. But they’re expanding into other retail areas – and loan providers are planning to partner with physical stores.
Lyst, an online clothing store featuring brands such as Burberry, Marc Jacobs and J. Crew, offers loans through Klarna. And Walmart is considering loans at Affirm’s cashier for items over $ 200, according to a Wall Street Journal report.

The loans are attractive, with low monthly payments and a payment process as quick as asking for a credit card in a store. But there are downsides, such as high interest rates for people new to credit and the temptation to overspend, says Byrke Sestok, certified financial planner at New York-based Rightirement Wealth Partners.

Convenience at a price

Behind the scenes, tech startups introducing point-of-sale loans are trying to shake up the old concept of store finance. Targeting millennial buyers in particular, these lenders tout fast loan applications with no hidden fees and no credit approval for those who generally do not qualify.

The loans are suitable for consumers who can’t get traditional credit or who like the simplicity of fixed monthly payments versus the potential for interest accrual on credit cards, says Philip Bruno, partner at McKinsey consulting firm.

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But access to credit comes at a price. While some retailers may offer promotional interest free rates, Affirm and Bread’s annual percentage rates, for example, can be as high as 30%. A $ 345 purse from Rebecca Minkoff will end up costing you $ 385 if you pay it off with a 12-month loan from Affirm at 21% APR – the average rate for its borrowers, Affirm says.

Lenders use local algorithms to check creditworthiness, paying less attention to traditional data such as your credit score and history. Companies declined to reveal their specific criteria, but applicants may be asked to let a lender review their checking account transactions, for example.

Not all buyers are approved. Borrowers about to qualify may only get a partial loan and have to pay part of the purchase price up front.

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How purchase loans work

The process is similar to selecting a store credit card at checkout. The loan option may appear next to the purchase price or in your shopping cart. In the online experience, selecting the loan option will direct you to the lender’s website or a smartphone app. You enter some personal information – usually your name, date of birth, and the last four digits of your Social Security number, or in some cases just your phone number.

If you are approved, the lender will display multiple loans with varying interest rates, monthly payment amounts, and terms. You choose a loan, sign the agreement, and complete the payment. Just like with a store credit card, the whole process takes anywhere from seconds to minutes.

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What consumers need to know

Convenience aside, consumers need to know what they’re getting into, says Carole Reynolds, senior counsel at the Federal Trade Commission. She recommends asking these questions before signing an agreement:

  • What type of financial product is it, and what are the terms? Many companies offer installment loans, which have fixed rates and repayment periods. Others offer leases, lines of credit or zero percent financing for a limited period. Each type comes with certain legal rights for consumers, Reynolds says.
  • What is the impact of the loan on your credit? Every time you apply for a loan, your credit information is pulled and the loan will appear on your credit report. However, some lenders will report your loan payments to a credit reporting agency, which could positively affect your credit score, Reynolds says.
  • What is the return policy? If you have a problem with the item, determine if the retailer or lender will take care of it, says Reynolds. Also check the dispute resolution process if you are billed incorrectly or have other issues.

This article was provided to The Associated Press by the NerdWallet personal finance website. Amrita Jayakumar is a writer at NerdWallet. Email: Twitter: @ajbombay.

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