In the modern market, consumer financing comes in many different forms. Historically, there are several different ways that merchants have been able to increase their customers’ buying power, these include:

• Store credit cards
• Consumer loans
• Rent-to-own plans

The primary issues with these typical retail markets are the interest cost associated with them and their impact on credit. While some cards and loans have promotional periods that eliminate interest for a given period of time, there is eventually a point where interest can be charged. Additionally, even if consumers make their payments on time, these financing products are still reported to credit bureaus, impacting the consumers’ credit scores.

As a result, the market has adapted, and interest-free payment plans for customers have emerged to reach those not satisfied with traditional flexible payment options. Let’s break down the pros and cons and compare these plans with the finance products that came before them.

Pros of Interest-Free Payment Plans for Customers

These buy now, pay later (BNPL) payment plans solve many of the problems that consumers have with other credit options. There are a few distinct advantages for customers that make them more attractive:

• No interest through the entire payment term.
• No impact on credit if paid on time.
• Simple payment structure.
• One-click application and sign-up.

BNPL programs open up retail customers in any market to consumer financing by eliminating interest and credit impact. Retailers that sell smaller-ticket products used to be a tough sell for consumer credit as the risk seemed to outweigh the reward. By minimizing potential risk, interest-free payment plans significantly broaden the horizons of financing in these industries.

Additionally, these payment plans function simply by separating the value of a purchase into multiple equal payments. This makes them much less complex than other forms of consumer credit, as there is little to no variation between payments and no interest rates that can change over time. This simplicity is yet another friction-reducer for consumers, making financing more approachable and attainable.

Cons of Interest-Free Payment Plans for Customers

Interest-free payment plans for customers don’t have too many drawbacks, and those that exist are small. Although, it is still important to note them so that merchants are equipped with the right information if they decide to adopt them:

• No credit-building potential
• Terms can be limited
• Rigid payment structure

Some of BNPL’s biggest advantages can also be seen as downsides for some consumers. Namely, consumers looking to build their credit with their consumer financing won’t see much of a benefit from a payment plan that doesn’t report to credit bureaus. This means that a successfully paid BNPL plan will typically not show up on a credit report, and due to the shorter term length, wouldn’t help much if it did.

Speaking of shorter terms, most retail BNPL programs are limited in length. The most common format is the “Pay-in-Four” platform which will only break sales into up to four payments for smaller purchases. Luckily, industries with larger average ticket sizes will often have much more flexible term lengths to adapt the format to their market.

Finally, interest-free payment plans usually break up purchases into even payments, which provides less flexibility than financing tools like credit cards. Credit cards allow consumers to pay whatever they want, whenever they want, as long as they meet minimum payment requirements. This format is designed partially to maintain balances long enough for them to accrue interest, so this probably isn’t helpful to most consumers.

Skeps Consumer Financing Platform

Skeps is the only true end-to-end POS financing platform for merchants looking to increase revenues and repeat business by offering POS financing. We can connect merchants with lenders through our cutting-edge software platform and allow merchants to provide their customers with any type of consumer financing. Our simple user interface makes things easy for applicants and merchants, reducing friction and driving sales growth.