Thanks to COVID-19, the 2020 holiday shopping season will be one like never before. Shoppers used to bursting into malls at midnight for Black Friday deals will largely flock online for their gift buying. Others will order merchandise online then go in-store to pick up their purchases. Regardless of how they choose to shop, more consumers will have a heightened concern for health and safety as the pandemic rages on.
But safety isn’t the only concern on consumers’ minds. The economy came to a grinding halt in March when COVID-19 emerged in the United States, leading to skyrocketing unemployment claims. While social distancing mandates and restrictions are slowly unwinding in certain parts of the country, Americans are still largely reeling from the devastating financial impact the pandemic has had on their lives. With money tighter than ever, splurging on holiday gifts isn’t necessarily possible for every family. That’s where installment loans come in.
Brian Riley, Director of Mercator Advisory Group’s Credit Advisory Group, sat down to explain how the buy now pay later model of installment loans will likely impact this year’s holiday shopping season.
What are installment loans?
Installment loans are a broad term for a type of loan that is repaid through installments, or regularly scheduled payments. They follow a buy now pay later model that enables consumers to take home their merchandise without covering the full cost upfront. This provides immediate relief, especially if a large purchase is being made, for consumers on constricted budgets. For example, Apple’s $1,300 MacBook Pro can be bought online at its full price or be divided into 12 interest-free monthly payments of approximately $108.
Apple isn’t alone. Mega-chains like Walmart and other large retailers have already made efforts both online and at point of sale (POS) terminals to accept alternative financing like installment loans. In addition, a recent PayPal survey cited by Forbes found that 26% of online retailers will likely offer buy now pay later options to customers this holiday season. Among retailers that already offer installment payment options, 45% believe they will lead to an increase in holiday sales.
The pros and cons of buy now pay later
Installment loans are “positioned well for where we are in the economy,” said Riley. For some consumers, the buy now pay later model is an appealing alternative to using a card with a standing line of credit. “For consumers, alternative digital payment options such as buy now pay later promote choice and flexibility,” noted Lauren Jones, Global Payments Ambassador at Icon Solutions, in a recent PaymentsJournal article.
But there are scenarios to be cautious of when it comes to using installment loans. “If a household uses [buy now pay later] to finance the holiday gifts for three kids, they could end up with eight to 12 of these monthly payments, which is a different proposition than” a stacked credit card bill, said Riley. It’s important for consumers to stay conscious of how much they’ll end up owing once the holidays are over.
The takeaway: Buy now pay later is here to stay
Despite the risk that comes with accumulating too many installment loans, consumers are eager to use them and merchants are eager to offer them. “We expect to see installment loans or alternative financing in full force during the upcoming holiday shopping season,” commented Raymond Pucci, Mercator Advisory Group’s Director of Merchant Services.
This is “not only because merchants are moving the season ahead in order to elongate it and have more shopping days, but also because the field of installment loan lenders has grown so large due to growing adoption from merchants and consumers alike,” he added.
With the holidays rapidly approaching, installment loans can be used as a valuable cushion to mitigate the financial impact of the holiday shopping season—as long as consumers spend wisely to avoid being overwhelmed with monthly payments come the New Year.
