What Is a Point-of-Sale Loan and Are They Worth It?

Big expenses usually require big loans. You wanna buy a house? You’ll likely need a mortgage. You wanna renovate your kitchen? You’ll likely make use of a home equity loan. But what about smaller – yet significant – purchases? For those, you might want to consider point-of-sale (POS) financing.

We’ll review what a point-of-sale loan is, how it works and whether it’s worth using one the next time you buy something you’d prefer to pay for over time.

What Is Point-of-Sale Financing?

Point-of-sale financing (or pos financing) lets you pay for a purchase by splitting up the total price into a plan with fixed payments over time (essentially an installment loan). Many third-party lenders – like Affirm and Klarna – partner with retailers to offer point-of-sale financing for online and in-store purchases.  

The terms of a point-of-sale loan can vary by lender. And their financing plans may have certain conditions, particularly around interest rates and lengths of repayment.

How Does Point-of-Sale Financing Work?

Point-of-sale financing may look a lot like other financing options that might be familiar to you, like a mortgage or auto loan. 

A point-of-sale loan is typically offered by a merchant. It includes an application, a credit check and a loan agreement that outlines payments and the loan’s terms and conditions. Once your application is approved, you’ll usually make an initial, upfront payment at check out, receive the item then make scheduled payments over 6 or 12 months.

Buy Now, Pay Later

Buy now, pay later (BNPL) is a popular way to buy smaller items with point-of-sale financing. Have you ever been ready to check out your cart online, and you got a payment option to split the total amount in your cart into four payments? That’s an example of BNPL. 

With BNPL, the merchant will keep your credit or debit card on file and automatically bill you every week, 2 weeks or every month until your purchase is paid off. 

A point-of-sale loan and BNPL are similar, but there are differences.

• BNPL loans are used for smaller purchases: Consumers might use point-of-sale financing to buy a new refrigerator, but a BNPL loan to buy a new pair of shoes. BNPL loans also have shorter repayment periods than point-of-sale loans.
• BNPL loans are easier to qualify for: BNPL financing has a more relaxed underwriting process than other point-of-sale loans. In some cases, applying for a BNPL loan won’t even trigger a hard credit inquiry.

The Point-of-Sale Process

Lenders will collect basic information like your name, your date of birth and your Social Security number, which will be used to check your credit. FYI: A point-of-sale loan might require a higher credit score or additional underwriting requirements compared to a BNPL loan.

Once you’re approved, you’ll agree to make your payments on a schedule, like once a month for 3 months, for example. The agreement will include language about late payments. In news won’t surprise anyone, the language is usually that you’ll be charged a fee for late payments. 

For some point-of-sale loans, you may be charged interest. That rarely applies to BNPL loans. 

If you return the item you paid for with point-of-sale financing, you might not get a refund right away. You will likely need to continue making regularly scheduled payments until the refund is processed.

Point-of-sale loans may be worth it for sizable, one-time purchases, especially if you don’t have a credit history. As long as you make your payments on time, point-of-sale financing can be a money-savvy way to use short-term debt for a larger purchase. 

When Is Point-of-Sale Financing a Good Idea?

Point-of-sale financing can be a good idea if you don’t have credit or have a thin credit history. But just because you qualify for point-of-sale financing doesn’t always mean you should take advantage of it. 

Consider reserving point-of-sale financing for larger, one-time purchases you can comfortably afford to repay. 

Here’s a situation to illustrate our point: 

Let’s say you’ve saved up for a new leather couch that costs $2,000. You’ve got a good amount saved already, but you’d prefer to spread your payments out over a few months, and you know using one of your high-interest credit cards will only make the couch pricer. 

Fortunately, the furniture store is offering 0% interest financing if you pay for the couch in 3 monthly installments. 

Well, that works for you because you already have $1,700 saved, and you can afford to make $500 monthly payments over the next 3 months. And because you don’t want to spend a penny over $2,000, you make a promise to yourself to make your payments on time so you’re not adding late payment fees to your purchase. You get to checkout, make the first $500 payment and take your new leather couch home, confident that it will be fully paid off in 3 short months. 

How Is 0% Interest Possible?

When you find a 0% interest loan, it usually means the retailer is paying the lender the interest. They make their profit from the sale of the product.

What Are the Disadvantages of Point-of-Sale Financing?

At first glance, point-of-sale financing might look like an easy way to buy what you want without paying for it right away. While that is true, there are disadvantages to point-of-sale financing you should consider.

Interest rate

The most obvious disadvantage is potentially getting charged a high interest rate, making the item you purchased more expensive than the sticker price. 

Now, you might be thinking, “Well, that’s not my problem because I only use point-of-sale financing when I can get a 0% interest rate.” Spoiler alert: Many of us tend to overspend when we realize we don’t have to pay for everything all at once. 

Let’s say you’re budgeted to spend $150 on clothes every month. Of course, your favorite designer debuts a new fashion line, and by the time you’re done getting everything in your size, your checkout cart total is $400. You notice the retailer offers a payment option to pay off your cart with four $100 monthly installments. Do you see where this is going? Because you’re “only” spending $100 a month, it might be easier to go out for expensive sushi with your friends later or add even more items to your cart. Point-of-sale financing can give you the impression you’re stretching your dollar further, but that’s not the case. You are taking on short-term debt that could hurt your budget (and credit score) if it gets out of control. 

Hidden fees

Another disadvantage of point-of-sale financing: hidden fees or other terms buried in the fine print. These can include late payment fees, which are typically a percentage of the loan amount or a flat fee, like $10 or $35.

Impact on credit score

Point-of-sale financing can also have an impact on your credit score – and the impact can either be helpful or harmful. If you make your payments on time, point-of-sale financing can boost your credit score. If you don’t make your payments on time, financing will damage your credit score. 

If your credit score is on the lower end, keep in mind that when you apply for new credit, a creditor will make a hard inquiry on your credit report, and the inquiry will temporarily drop your score.

Potential problems with returns

Returning an item may be more challenging if you used point-of-sale financing to make the purchase. While you technically bought the item from a retailer, you likely paid for it through a third-party financial lender. You might have to continue paying off the purchase until the refund is processed. 

What Are Alternatives to Point-of-Sale Financing?

If you want to buy something today and pace your payments, point-of-sale financing isn’t your only option. Here are two common alternatives to point-of-sale loans:

Credit cards

Some credit cards offer 0% introductory interest rates for several months (you usually have to open a new card to get these offers). The downside of credit cards is their interest rates. Once the 0% intro period ends, the interest rate on the card will climb.