How pay-in-four works
At checkout the price is split into four payments, the first due immediately and the rest every two weeks, with no interest. The lender earns its money from the merchant, who pays a fee because shoppers offered installments spend more, and from late fees. Longer plans of six to thirty-six months are ordinary installment loans, and their interest rates can reach 30 percent or more.
Where it goes wrong
- Plans stack. Five of them at $40 every two weeks add up to $400 a month, spread over due dates that no single statement shows you.
- Payments are pulled automatically from a debit card, so a thin checking account yields a late fee from the lender and an overdraft fee from the bank.
- Returns are slow, and you generally keep paying until the merchant confirms the refund.
- The dispute rights that federal law attaches to credit cards do not apply in the same way, and protections vary by lender.
- Credit reporting is inconsistent and changing. On-time payments may build nothing, an account sent to collections can still appear, and the lender's own terms say what it reports.
The older traps
Deferred interest store financing promises no interest if the balance is paid within twelve months or so. Leave one dollar unpaid at the deadline and interest is charged retroactively on the entire original purchase, often at a rate near 30 percent. If you take such an offer, divide the price by one month fewer than the term and automate that payment.
A payday loan typically charges about $15 per $100 borrowed for two weeks, which works out to an annual rate near 400 percent, and most are renewed repeatedly. Auto title loans charge similar rates and put the car at stake. Rent-to-own contracts commonly total two to three times the retail price. A credit card cash advance carries a fee of 3 to 5 percent, a higher rate, and interest from the first day with no grace period.
Better ways to cover a gap
Ask the biller for a payment plan first, since medical offices, utilities and the IRS all grant them at little or no cost. Credit unions make small loans, including payday alternative loans that federal rules cap at 28 percent. A card with a true zero percent introductory rate, which is not the same thing as deferred interest, suits a planned purchase for someone with good credit.
Note Every financing button at a checkout exists because it makes people spend more. Assume it works on you as well.
