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Buy now, pay later? Layaway apps see triple-digit growth amid pandemic shopping

Some of the country’s biggest retailers are resurrecting a modern version of a long-retired payment option similar to layaway or rent-to-pay.
Image: Target
Shoppers leave a Target store after shopping in Niles, Ill., on Nov. 28, 2020.Nam Y. Huh / AP

Some of the country’s biggest retailers are resurrecting a modern version of a long-retired payment option similar to layaway or rent-to-pay — buy now, pay later.

With over 11 million people still unemployed due to the pandemic, Neiman Marcus, Saks Fifth Avenue, Sephora, Target and Amazon are some of the hundreds of retailers who are offering shoppers a way to parse out interest-free payments debited from a bank account over time for holiday gifts instead of forcing consumers to pay with high-interest credit cards.

“The millennials and Gen Z generation saw their parents go through an immense amount of hardship [during the financial crisis] where the American consumer was over-leveraged,” Rafe Petkovic, chief revenue officer of Columbus, Ohio-based payment solutions company Klarna, told NBC News. “Today’s consumers are certainly wising up, and that has been a significant acceleration in the market opportunity here today.”

Already, consumers have used their money differently from the generation that survived the Great Recession. In the first three months of 2020, consumers improved their average credit scores and decreased delinquencies across all debt, according to a September analysis by Experian credit-reporting agency. However, in 2008, going into the recession, consumer debt spiked by 4 percent, credit scores went up by just two points and delinquencies were reduced at a slower rate than today’s borrowers.

Over Black Friday weekend, one company said it processed five times more transactions than in its first four years of operation combined.

“Though the current recession's initial three months of consumer debt and credit data paint a positive picture of consumer finances, unemployment has spiked to historic highs in 2020,” the bureau reported. “As income declines and stimulus aid continues to lapse, consumers' finances may change as people seek ways to cover their expenses.”

Before the pandemic, the digitally native younger generations were already quickly adopting "point-of-sale" loans from companies such as Affirm, Afterpay, Klarna and Quadpay. But over the course of the pandemic-induced recession, these payment options have skyrocketed with the rise in e-commerce and the willingness of retailers to work with customers, Adam Pressman, a managing director with AlixPartners, told NBC News.

Consumer downloads of Klarna are up over 106 percent from last year, Petkovic said. In the first month of the pandemic, Affirm saw a 163 percent increase in home fitness sales, and home office sales grew 200 percent. Over Black Friday weekend, Afterpay said it saw a 186 percent increase in sales, while Klarna said it processed five times more transactions over the weekend than in all the first four years of operation combined.

“We think this is just the start of more disruption to come,” Petkovic told NBC News.

The loans work like this: Retailers pay a transaction fee on every sale, and shoppers pay their balance over time with their debit account. Affirm, which charges interest rates between 10 and 30 percent, report to one credit bureau. But Klarna, Quadpay and Afterpay do not. Each company charges a late payment fee that ranges from $35 per missed monthly payment with Klarna to a $7 late fee with Quadpay. Affirm doesn’t charge late fees.

“I think this will be as ubiquitous as free shipping,” Brad Lindenberg, co-CEO of Quadpay, told NBC News. “Every site, I think within a matter of a couple of years, will have an option to pay in installments.”

The financial services industry has certainly taken notice. The burgeoning buy-now-pay-later industry could soon outstrip traditional credit cards if merchants get on board in a big way, Ted Rossman, an industry analyst with, told NBC News in an email.

Retailers make less money on a purchase with a point-of-sale loan, but with scale they can avoid credit card fees and use these partnerships for marketing or customer data, he said.

Within a few years, every retail site will likely have an option to pay in installments, experts say.

"Young adults love debit cards, and debit has done well across the board during the pandemic,” Rossman said. “Buy now pay later could be a hybrid between debit and credit, at least for some consumers.”

But these payment methods also come with pitfalls that consumers should consider, Kimberly Palmer, a personal finance expert with Nerdwallet, told NBC News in an email. While it’s tempting to pay for a purchase with one of these loans, “doing so can result in greater costs over time.” The interest or fees can add up to be as high as 30 percent, she added.

“If you really need to purchase something and you don’t have access to a 0 percent intro APR credit card or savings, then using a shopping loan (also called point-of-sale loan) is a viable option,” she said.

As with any loan, debt is debt, according to Gannesh Bharadhwaj, general manager of credit cards with Credit Karma. It’s important to read the fine print, stick within your budget and make payments on time, he told NBC News.

Justin Childs, an admissions coordinator with Florida International University in Miami, told NBC News he uses Afterpay, Affirm and Quadpay for nearly all of his purchases even though he has credit cards. Over Black Friday weekend, he used the apps to shop at Best Buy, Banana Republic and to buy toys for his niece and nephew. He’s never been late on a payment.

“My parents aren’t budget-type individuals, so being on my own I know I have to take care of these things,” he said. “This allows the shopoholic to roam free — but also be conscious of those budgeting things I have to take into account.”