Service of Installment Plans: Another 2008 or Am I Being Elitist?

September 23rd, 2021

Categories: Credit, Credit Card, Finance, Financial Rating Agencies, Installment Shopping, Red Flag, Retail


Image by Michal Jarmoluk from Pixabay

I wonder if we are facing another potential financial debacle brought on by the kind of spending without ability to pay that caused the 2008 mortgage catastrophe. The red flag I’ve identified is small potatoes compared to mortgage debt, but in the aggregate could be significant if the bottom falls out. The buck stops somewhere.

According to AnnaMaria Andriotis installment shopping is back and going strong. The Wall Street Journal reporter wrote the article: “Amazon Is Doing It. So Is Walmart. Why Retail Loves ‘Buy Now, Pay Later.’ Retailers big and small are using installment plans to wring more sales out of shoppers who can’t get credit cards.”

Andriotis reported: “Buy-now-pay-later companies say they rely less on—and in some cases bypass altogether—traditional credit scores and reports. Doing so allows them to approve more consumers. Shoppers gain the ability to buy things even without cash on hand—translating to higher sales for retailers.”

Bypassing traditional credit scores and reports so as to approve more consumers are danger signals if history shares a clue. We’re talking about sales increases due to installment shopping of $8.2 billion this year.

“Shoppers spend more at Macy’s when they use installment plans offered through Klarna Bank AB, Macy’s CEO Jeff Gennette said on a recent earnings call,” wrote Andriotis. “Klarna also is helping the retailer attract younger customers, he said.”

She reported: “Interest rates and other terms vary by payment-plan provider. Affirm interest rates range from 0% to 30%, with some 43% of its transactions during its last fiscal year not charging interest at all. The company doesn’t charge late fees. Afterpay doesn’t charge interest but does collect late fees.”



Image by StockSnap from Pixabay

Andriotis wrote: “Merchants take no credit risk with these plans, but the fees they incur can be higher than on credit-card purchases—often between 3% and 5% of the purchase price, according to people familiar with the matter.”

I’ve always questioned the “buy now and pay for your sofa in two years,” concept. After all that time who wants to pay for something that may already be marked by coffee stains?

I’ve increasingly noticed websites that offer the option of paying for an item in four parcels even if it costs $20 or less. Only if you are desperate for diapers, detergent or TP and have maxed out your credit card can I understand welcoming the opportunity for small amounts. Naturally these customers have a credit card to buy online but the enticing installment model is similar.

When will we learn? Haven’t we seen before what happens when customers can’t pay for the purchases they incur while benefiting, in this case retailers, who pass the debt on to another company–with low standards–that takes the financial risk? What will the tipping point be?

Am I being elitist by suggesting that if ineligible for a credit card you shouldn’t put nonessential goods on an installment plan but should wait to buy them when you have the cash? Do you also predict potential trouble ahead brought on by a buying frenzy based on another opportunity to push payments ahead or am I seeing canaries that are only snoozing in a coalmine and are not yet dead?



Image by StockSnap from Pixabay

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9 Responses to “Service of Installment Plans: Another 2008 or Am I Being Elitist?”

  1. BC Said:

    Another tragedy- I have a few friends who max out all of their credit cards, and then pay massive interest charges. Buy now, pay later may work for the very poor, who have almost
    nothing in the first place, like chairs and tables.

  2. Jeanne Byington Said:

    BC,

    It is a tragedy because it entices those who may be financially stable for the moment to buy stuff they don’t need and if a partner or child gets sick and they can no longer pay the installments….it adds to their debt and anxiety.

    A college friend rented his room from a family with three kids. Dad was a barber. Mom didn’t work except during the Christmas season when she took a temp sales job. Her entire salary went to pay for the biggest collection of toys and games for the children you’ve ever seen under a Christmas tree!!!!! We thought the extravagance was over the top but they didn’t hurt anyone and didn’t owe a penny on December 26. How old fashioned is that!!!!!

  3. Debbie Kunen Said:

    Debbie on Facebook: No matter the cash flow, managing credit is very personal. Discipline is required.

  4. Linda Levi Said:

    Linda on Facebook: I’m the wrong one to ask or perhaps even comment. Other than a mortgage or college loan, both long paid off, I’ve never bought anything on credit or installment plan. Being fiscally conservative doesn’t run in my family however. I recall my brother when he was in his 20s buying a car with just $25 down!

  5. Jeanne Byington Said:

    Linda,

    Tax laws change yearly but a wealthy man, years ago, said his accountant urged him to take a bank loan for $20,000 toward the purchase of a top-of-the line Mercedes for its tax benefit. He could have written a check for the full amount. His story was about how major NYC banks refused his request while a then tiny regional bank grabbed at the chance. They could have sold his car for more than the money owed had he defaulted plus he had a stellar credit record and owned his company which was doing extremely well. The major banks turned him down because he had access to too much credit.

    I’m not worried about the impact on the economy or the financial danger to wealthy people who borrow money or pay on installment plans for things that, once used or are removed from the store, have no value once they’ve left the store.

  6. Jeanne Byington Said:

    Debbie,

    I am concerned for those with no discipline and what, should enough of them default, the impact will be on the rest of us who figure out how to pay our debts whether immediately or over time.

  7. Debbie Kunen Said:

    Debbie on Facebook: Agree just add it to the list of things that negatively impact the rest of us (no vaccines, no respect for Red traffic lights when crossing the street) shall I continue? ☹️

  8. Lucrezia Said:

    Lucrezia on Facebook: Installment plans are fine if one plays by the rules,. Depending upon the promotion, one can actually save money. Thousands may be saved by lending through a no-interest outfit when faced by eyepopping dental costs or high priced items. The requirement is to satisfy the loan on or before a stated deadline. To break the agreement invites costly consequences.

  9. Jeanne Byington Said:

    Lucrezia,

    You reminded me: I have paid my dentist in dribs and drabs…but with no formal agreement. After all these years he knows I’ll pay. I’m lost without him. He knows that too!

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