Interest-Free Payment Plans: Are They Right For You?

What Are Interest-Free Payment Plans?

Interest-free payment plans are a retail payment method that allows you to pay in installments over a period of time. When you reach the checkout page at a growing number of retailers' websites, like Wayfair, H&M and others, you'll see a payment plan listed as one of the payment methods. It might be called "Pay with Affirm," if that's the point-of-sale company the retailer partners with, or referred to by another name, like "Wayfair Financing."

You'll apply for financing from the store's partner lender directly from the checkout page, and if you're approved, you'll receive an interest rate and repayment schedule like any other loan would offer. What's different about interest-free payment plans is that, like the name implies, many retailers and point-of-sale financing companies offer an introductory interest-free period.

Afterpay, for instance, breaks up your purchase into three or four equal payments, charging no interest for customers who qualify. Klarna offers shoppers the option to split a payment into four installments, interest-free, or to pay up to 30 days later. Affirm is closer to a traditional personal loan in that it will offer you a personalized interest rate and repayment schedule based on your credit profile.

Drawbacks of Interest-Free Payment Plans

Payment plans are useful if you don't yet have a credit card or if you prefer to make a predetermined monthly payment toward a purchase instead. But since this payment method is new to many consumers, its many drawbacks are new too.

If you choose Affirm, for instance, and you don't pay off an item within the promotional period, you could be subject to interest rates of up to 30%. Afterpay charges a late fee of $8 if you don't pay on time. Klarna says it may conduct a hard credit inquiry when you apply for financing, which will show on your credit report and potentially lead to a temporary hit to your credit.

Since Affirm reports payment activity to Experian, you'll see a positive payment history appear on your Experian credit report when you pay bills by the due date. That also means, though, that late or missed payments will negatively affect your credit score. Other lenders may not report payments to the credit bureaus, so your score won't benefit from responsible behavior and on-time payments.

Some payment plans, such as Apple's offering, require users to apply for and use a store credit card in order to take advantage of interest-free financing on certain items. That makes the decision of whether to go for an interest-free payment plan even more consequential: How much interest will you pay after the promotional period? Will the credit card get you benefits and rewards that you'll use beyond that time?

If it's not in line with your spending otherwise, or the interest rates and fees on non-promotional items would deter you from spending with the card, opting for a different card might be the better option. More on that below.

Is It Better to Use a Payment Plan or Credit Card?

When you use a credit card instead of a payment plan, you risk a large purchase sitting on your card and gathering interest. But if you could qualify for a 0% Intro APR credit card—especially one with rewards for purchases—it could make sense to go that route. When deciding whether to use a payment plan or credit card, consider the following:

• Will you pay off the purchase within the payment plan's interest-free period? In the right circumstances, an interest-free payment plan could be a good choice. Generally, only go for it if you qualify for an introductory 0% payment period and you feel sure you can pay off the purchase in time. If you won't undergo a hard credit check, you don't expect to miss a payment and you wouldn't be able to buy the item without the breathing room provided by the payment plan, it could be worth it. That way, you're also not opening a new credit card or adding debt to an existing credit card, and once the purchase is paid off, you can move on.
• Could you qualify for a 0% intro APR credit card? If you need more time to pay off the item you've bought, and you have good to excellent credit, you may qualify for a credit card with a 0% APR promotional period. That means you could have six to 18 months to make payments, depending on the card. Some cards also provide rewards such as cash back or travel points. Ideally, you'll pick a credit card that fits your overall lifestyle and spending behavior, not just the purchase you're looking to make right now. If you need help deciding which card might be right for you, Experian's card comparison tool can match you with cards you may qualify for based on your credit profile.
• How much other debt do you have? It's also important to ask whether now is the right time to buy an item you can't pay for in full. Anytime you make a purchase on credit, you risk not being able to make payments in the future, and therefore putting your credit in jeopardy. If your other debt obligations or budget constraints already feel overwhelming and are encouraging you to consider a payment plan, wait 24 hours to make the purchase. You might find you can do without it for longer than you expected, or at least until your credit card balances or bank account can better accommodate it. While you're considering a payment plan, check your credit score and report to see where you stand and how a new payment might affect you.

How to Manage Payments and Stay on Top of Your Budget

When you've added a new monthly payment to your budget, it's crucial to make sure you can pay it on time. That means using the following strategies:

• Set up automatic payments. Interest-free payment plan providers typically allow you to connect a credit card or bank account to their platforms so you can pay automatically each month. Ideally, you'll pay from a bank account so you don't inadvertently add to your credit card debt. Make sure you'll have enough money in your account each month so you avoid fees charged if your payment doesn't go through.
• Pick a budgeting method. If you haven't already, consider using a specific budgeting plan that can help you keep other spending in check. For instance, you could opt to follow the 50/30/20 rule, which recommends spending 50% of after-tax income on necessities, 30% on non-necessities and 20% on savings and debt payoff. Make sure your debt payments fall within that 20%, and if they don't, pull from the non-necessities category to cover them. That means you might have less money to work with for entertainment or travel until you reduce your debt.
• Stay motivated. When you're motivated to get rid of debt on a certain timeline—as you should be when working within an interest-free period—set goals, and reward yourself when you hit them. Decide on a reward that will truly motivate you, and that doesn't involve another big purchase: maybe a hike and picnic in your favorite location or a movie marathon with friends at home. Work toward it, and when your purchase is paid off, feel proud and deserving that you set out to do what you planned.