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The return of layaway? A new tech-driven riff is bringing the idea back, in a big way

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DISCLAIMER: As the COVID-19 public health situation evolves, new regulations are being continually issued. This page/story/information may not include the most recent information.

By Art Raymond@DNTechHive  Nov 27, 2021, 9:00pm MST

There was a time when shopping at almost any U.S. retailer included the option to choose an item you were after and have it stashed away in some back room while you made incremental payments until the purchase price was covered and you could take it home.

Those layaway plans mostly disappeared decades ago as credit cards arose as the go-to option for consumers to cover the cost of goods they couldn’t quite afford in the moment. In-store financing also became a thing for many stores, particularly those offering high-ticket items like furniture and appliances.

Now, a tech-driven option that occupies a sort of middle ground between layaway and in-store financing is on the rise and, like the purchase plans that have come before, it could cost you.

Buy-now-pay-later doesn’t sound like a particularly fresh idea, but a growing number of tech platforms are finding success in partnering with retailers to offer portals for issuing credit at time of purchase that allows the consumer to check out, virtually or in-person, with their goodies after agreeing to an installment plan. Some charge interest, some don’t, and rescheduling a payment or paying late can also come with charges.

In spite of U.S. consumers having record-high household savings rates over the past nearly two years of pandemic conditions that put the brakes on a lot of discretionary spending, the new buy-now-pay-later systems are, quite simply, kind of killing it.

On Wednesday, Adobe Analytics reported the number of online holiday shopping orders paid for using buy-now-pay-later plans this year is up 466% over 2019 and the value of those purchases up 447% over two years ago.

But, why not just use a credit card?

Buy-now-pay-later providers have carved out a consumer financing niche, using real-time “soft” credit inquiries that don’t pull up credit scores, don’t appear on the applicant’s credit report and, should credit be issued, doesn’t report new debt obligations back to credit agencies. This opens the door for applicants who may not qualify based on their scores, want to avoid maxing out current credit cards or who simply don’t have ample credit history to pass a more in-depth credit assessment.

In a recent report from Investors.com, Chief Financial Officer Michael Linford, from buy-now-pay-later platform Affirm, said there are motivations beyond credit challenges pushing consumers toward the new installment payment options.

“Users range the full credit spectrum from super-high FICO scores with pristine credit to folks who are distrustful of revolving credit vehicles all the way down to people who have thin credit files or no files,” Linford said.

To be clear, not all of the buy-now-pay-later providers offer interest-free payment plans, and Linford’s company is perhaps most notable among them. Affirm has struck deals with Amazon, Walmart, Peloton, Wayfair and others and assesses installment plan interest rates ranging from 0% to 30% based on the applicant’s credit, according to the company.

Walmart has been among the few big U.S retailers that kept layaway alive for shoppers but recently shelved the option, now offering the Affirm financing instead for customers who want to pay over time.

In lieu of interest-generated revenues, many of these new credit issuers harvest earnings from merchant fee charges that run significantly higher, 4% to 5% of purchase values, than what stores pay credit card issuers, around 2% of purchase value, according to Investor.com.

A July report from McKinsey and Co. found around 65% of consumers making buy-now-pay-later purchases had credit scores above 700, and noted the transactions Affirm mediated with Peloton, the maker of pricey home exercise bikes and equipment, were with consumers that had an average credit score of 740.

McKinsey analysts also reported about 60% of consumers say they are likely to use some type of point-of-sale financing over the next six to 12 months.

Some personal finance experts warn the lure of zero-interest financing and light-duty credit checks, combined with the shopping zeal of the holiday season, could lead to dire financial consequences for unwary consumers.

Last month, CNBC reported 1 in 3 Americans expect to take on debt this holiday shopping season, according to an October Credit Karma survey. But no matter how people plan to purchase their holiday items, consumers should be mindful of their spending, and any interest or late fees that may be part of credit card or buy-now-pay-later models.

Whether purchases are through a buy-now-pay-later service or a credit card, “consumers should fully understand the transaction,” a spokesperson for Affirm told CNBC.

“People tend to lose their minds, financially speaking, right around Black Friday,” said John Ulzheimer, a credit expert. “So, when you combine a higher delinquency rate with more debt, which is what happens at the end of the year, because of holiday shopping activities, you are combining two things that are pretty dangerous.”

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Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

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