Do Point-of-Sale Loans Encourage Overspending?

Budgeting for the perfect item — whether it’s a new pair of running shoes, an upgraded refrigerator or a flat-screen TV — requires some forethought and planning.

This is especially true when an item costs more than your monthly income (like, say, a $4,000 treadmill). But even a series of impulse purchases can throw your budget off track if you’re not careful.

In a recent study by coupon search engine Coupon Follow, 63% of respondents reported using buy-now-pay-later financing, aka point-of-sale (POS) loans, to afford something they bought online. Of this group, 60% reported they were able to get a POS loan that they otherwise would not have qualified for, and 72.6% reported adding extra items to their cart.

If you are new to credit or rebuilding a damaged credit score, POS loans might be easier to qualify for than a personal loan or 0% APR credit card. Companies like Affirm, Afterpay and Klarna now partner with major brands and department stores like Dillard’s, Peloton, H&M, Macys and many more to provide flexible payment options to a wider range of customers.

But while buy-now-pay-later options are convenient, this flexibility might cost you: POS loans often charge interest, so you pay more for the product over time. And even with no-interest options, you could get stuck paying off a loan for six months or longer.

When you’ve got a big purchase on the horizon, use a budgeting app like Mint to set goals so you can have enough cash on hand to pay for the product in full. Decide now how much you want to spend on holidays and birthdays for the year, then start putting aside monthly amounts into a savings account today.

Another option is signing up for an app like Goodbudget, which uses the envelop system to categorize your spending money every month. Consider making a category for “fun money,” or cash to spend on nonessential purchases like hair products, video games, skin care, etc. When you’ve used up your budgeted amount, know that more will come next month. Or, opt to save this month’s fun money so that you can double up next month. This approach could help you avoid those last-minute impulses purchases.

And if you want to get serious about where your cash is going, You Need A Budget (YNAB) will help you allocate every dollar of your budget. You can set spending and saving goals, then track your progress to see how well you honor your limits.

Borrow money from a friend or family member

The process of asking your family member or friend for a loan might help you get clear on exactly why (and if) you need the money. The benefit of borrowing from a loved one is that they probably won’t charge you interest (or very little), and talking to someone you trust about your finances might be a good way to help you prioritize your wants and needs.

If you go this route, just be sure to get the loan and repayment plan in writing. Decide on a monthly payment, just like you would with money you borrow from a bank, and how long you have to pay them back. Have both parties sign, and do your best to uphold your promise.

Use an upcoming windfall

With tax season upon us and a third Covid relief bill in the works, over 150 million Americans are expecting to receive an influx of cash in the coming months. Last year, the average tax refund was $3,125, but it could be more this year if you didn’t receive a stimulus check last year.

If you can avoid it, don’t spend your entire windfall. Map out a plan that includes saving, debt payoff (if necessary) and spending. This might mean splitting it up into thirds — put one-third toward something fun, one-third in…