How are you financing your life these days? With Americans now more than $1 trillion in credit card debt, it’s a question that requires some serious introspection. The average interest rate for credit cards now stands at a whopping 24.37% — and in a tightening credit market that has made borrowing more expensive, even the interest rate on personal loans is higher than it’s been in the last 20 years, at 11.31%.
Paying that much in interest to finance our lives can have a catastrophic impact on our financial futures — yet life happens, even when debt is incredibly expensive. According to a study from Citizens, over the next 12 months, more than half of all consumers (51%) will encounter a major life event, including buying a new home, having a child, moving, or getting married. That same study showed that 90% of all consumers are planning to make large purchases for themselves over the next year, including a vacation, a new laptop, or home furnishings… So, how do we pay for it all in the smartest, cheapest way possible?
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When we think about how to cover all our life expenses, the picture is completely different today than it was just a decade ago, explains Christine Roberts, president of Citizens Pay, the innovative consumer financing solution from Citizens. That’s because of advances in technology that have altered the way we pay — and because payment providers have increasingly pioneered within the space.
“Before, your choices were pretty much cash, credit cards, or debit cards. But today we’re seeing more POS (point of sale) financing offers, buy now, pay later (BNPL), and small installment loans from banks and credit unions,” Roberts says. All of these options can be far better for consumers than paying nearly 25% interest with a credit card — but only if you use them wisely. Here’s a breakdown.
POINT-OF-SALE (POS) FINANCING
If you’re someone who wants to be able to pay for a large purchase over time, or someone who enjoys the ability to upgrade to the most up-to-date tech, chances are you’ve either considered or enrolled in various POS financing programs from your favorite retailers. For example, Best Buy has partnered with Citizens Pay to offer “Upgrade+,” a program that lets you get the latest Apple technology now and pay for it monthly over time, and in doing so, you get an option to upgrade to a newer model every 36 months. Likewise, Apple has the “iPhone Upgrade Program” that allows you to pay for your phone in monthly installments, and qualifies you to upgrade to a new phone every 12 months.
“It may be much easier for someone to pay $60 a month for the next three years than it is for them to either pay the full $2,500 up front, or charge that purchase to a credit card at 25% interest,” Roberts says. “Knowing that you have a line of credit that allows you to upgrade those purchases as needed, at a lower interest rate, with a finite repayment period and clear payment terms — that might be a better option for you.”
Increasingly, POS financing offers aren’t just limited to purchases like electronics — the travel industry is the latest to get in on the action. Citizens Pay recently partnered with Wyndham Destinations to create a program for people to enjoy resort vacations that functions similarly to the programs at Apple and Best Buy — Wyndham vacation club members can pay for down payment costs through fixed monthly payments at more than 200 resorts in the U.S. For consumers, the beauty of the program is that there’s no multi-thousand dollar credit card bill waiting for you when you return home from your vacation. And companies like Wyndham are getting loyal travelers who will return to their properties year after year.
“If every two years you do a big trip, you now have the option to pay it off in the two years leading up to your trip. This is going to have a huge impact on the travel industry and enable more travelers to responsibly pay for and enjoy a dream vacation,” Roberts says.
BUY NOW, PAY LATER (BNPL)
First, a quick primer if you’re not familiar with the concept of buy now, pay later: these programs (Klarna, Affirm, Afterpay, etc.) are kind of like old-fashioned layaway programs, where you paid a little at a time toward an item you wanted, and then took it home once you paid it off — only with BNPL, you get your item immediately, then pay for it in pieces. Some key differences between POS financing and BNPL is that POS tends to have longer, more flexible repayment windows, and is often utilized for larger purchases, whereas BNPL payments are typically spread across four to 12 months, and can be used for both small and large purchases.
According to data from Citizens, nearly half (46%) of consumers who have not used BNPL services will consider it for upcoming purchases of $500 or more, particularly as prices rise due to inflation. But before using these programs, it’s important to take a long, hard look at your finances, and read the fine print on return policies — half of all BNPL users used the service for purchases they really couldn’t afford, according to the Consumer Financial Protection Bureau, and HerMoney has previously reported on the frustrations many consumers have when trying to return something purchased via a BNPL program. Plus, if you don’t make your payments on-time, every time, you can be charged interest and late fees — which one in seven consumers have done. In other words, proceed with caution.
“If you use it wisely, BNPL can be a pretty useful thing, but it’s important that people understand the particulars of the company that they’re working with, because they aren’t as uniform as credit cards and other types of loans,” says Matt Schulz, chief credit analyst at LendingTree.
Roberts echoes that sentiment: “You need to know what you’re paying for, how much you’re going to pay for it, and when you’re done paying for it,” she stresses.
SMALL LOANS FROM BANKS AND CREDIT UNIONS
Today, more banks and credit unions are offering their customers small loans of as much as $2,000 or as little as $100, for minimal interest — sometimes for as little as .5% or 1%. This has been a game changer for customers with poor credit, or for those who frequently found themselves paying overdraft fees due to insufficient funds in their accounts. According to data from The Pew Charitable Trust, six of the eight largest banks in the U.S. now have small installment loans or lines of credit “that cost at least 15 times less than average payday loans.” Although the exact interest rate for these small loans varies according to the institution and the amount borrowed, Pew says that the cost of the loan “should be only a small fraction of the loan’s principal.”
“Consumers have gotten a lot more informed, especially in this rising interest rate environment,” Roberts says. “They’re starting to really look at and pay attention to the fact that they could be paying less interest. They’re starting to understand where the best deals are, and what they really need.”
If you’re looking for a small loan, start local, Schulz says. “Sometimes working with your bank where you have your checking or savings account can be a really good way to get better terms on a loan than you might otherwise be able to get,” he says. “It’s also important to shop around and consider places like credit unions — they often have much better rates than some of the other big banks. For some reason, people don’t always think to look beyond the behemoth big banks, and that can cost you.”
COMPETITION FOR CREDIT CARD COMPANIES
Yes, these new, more affordable consumer payment options will eat into credit card companies’ market share — but given that the credit card industry is several trillion dollars in size, the “pie is big enough” that credit card companies are, for the most part, embracing different types of pay structures, Roberts explains.
“Choice is a good thing, because choice inspires competition,” Roberts says. “But consumers still have to read and understand the fine print. They have to look at the options available to them and decide which payment vehicle works best for their personal financial journey. Both can be helpful payment options.”
THE BOTTOM LINE
In the years to come, consumers can expect to see BNPL programs grow in popularity, and more point-of-sale financing offers popping up at all manner of retailers. “With technology being what it is today, people need to upgrade their devices on a consistent basis, which is why we’re going to see more point-of-sale programs that help make this easier,” Roberts says.
But keep in mind that financing options are only good when they’re used in moderation — on an as-needed basis. “Consumers need to step back and take a look at what their true exposure is to debt, and how much they can truly handle,” Roberts says. “You have to be thoughtful about how you divide up your exposure into payment methods that charge the least amount of interest, and what your total payments are across those various methods.”
MORE ON HER MONEY:
- 5 Essential Steps To Paying Off Credit Card Debt
- How To Get Out Of Credit Card Debt
- Are Travel Rewards Credit Cards Really Worth Having?
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