Be careful when looking into app-based loans.

Promises of zero percent interest? What could go wrong?

Why wouldn’t consumers jump into 0% interest loans through new app-based lenders?

Since COVID had slashed foot traffic to traditional brick-and-mortar stores, online shopping has skyrocketed along with innovations in payment alternatives. Among these new developments, you will find small-dollar amount installment loans you can repay monthly without paying interest.

Although growing in usage, 0% interest installment loans through companies like Affirm, Afterpay, and Klarna will still lead a large portion of consumers to overextend themselves in debt. Many borrowers will also run into high late-payment fees or negative effects on their credit rating.

Recently launched apps that offer zero-interest, short-term loans for making in-store purchases have exploded onto the consumer scene this year. Store after store is teaming up with these apps to offer their customers a 3-, 4-, or 6-month financing option at the checkout stand. All proponents of these services focus almost exclusively on the 0% interest, not on the amount of debt the consumer is accruing. It’s still debt, which can overwhelm any household budget at high levels.

It’s Still Debt

Looking at the chart from The Ascent, consumers clearly use debt vehicles like credit cards and new zero-interest loan apps to make purchases they can’t afford. Add the 38.4% who make purchases that don’t “fit” into their budget to the 24.7% who don’t want a credit check (usually because their credit rating fits the description of “precarious” due to debt troubles), then add another 14.4% who can’t get a credit card (almost always due to poor past debt issues or to be new to credit), and finally add the 14% who already have a maxed out credit card or two. Since respondents could choose more than one answer, the total of consumers who buy now and pay later because of debt troubles falls somewhere between 38.4% and 92%. Even at 38.4%, that means more than one in three borrowers cannot afford the purchase but place it on credit in order to pay for it later.

What would lead anyone to believe that delaying the payment improves anyone’s ability to repay the loan? Many of these households incur so much consumer debt that their minimum monthly payments already max out their budget. In such cases, high-interest rates might make things worse, but low or 0% interest rates on loans will not fix the problem.

To be direct, zero-interest loans will not solve over-borrowing problems. In fact, such low-interest and easy-to-access credit programs will actually accelerate the household debt. High debt balances mean larger minimum monthly payments which raise the likelihood of missed payments and a household’s inability to pay for basic needs.

Great for Retailers

Companies that have created and who manage these apps will earn revenue from fees and from agreements with retailers. Good for them!

Credit card companies may lose a lot of business to these options when consumers choose to use these apps because they offer greater clarity with regard to the resulting debts but also because of their ease of repayment when compared to credit card purchases. Credit card companies have long prospered by charging interest month after month on consumer purchases that happened months or even years in the past. Too bad for them!

Consumers as a whole will use these apps to fuel overspending, not lower debt levels. Higher debt balances will mean more missed payments, larger monthly installment payments, and less money to spend on their needs and wants. Not so good for them!

Retailers will minimize the credit card transaction fees they currently pay while increasing sales due to these new and easy-to-use services that promote consumer spending. Great for them!

Rather than laud these services as benefits for consumers, we need to keep in mind who benefits from them and who does not. Retailers stand to benefit most, followed by the app companies, while consumers will likely incur more debt, and credit card companies will lose business.

It Will Impact Your Credit

Zero-interest loans and low-interest loan apps will likely lead to changes in borrowers’ credit ratings. Interest rates play no direct role in credit scores. The FICO score considers a consumer’s payment history, the status of their debts, how old or how new their accounts are, and how much the consumer carries month-to-month on their account balances. However, of the 132 FICO score factors, not a single one refers to or looks at interest rates.

Consequently, these new zero-interest loans will have no direct effect on consumer credit ratings. However, as consumers’ debt balances rise and they begin missing payments because of over-indebtedness, credit scores will likely begin dropping.

Zero Percent Interest Loans through Apps Graph.jpg

Late Fees

These zero-interest loans do not always come without related fees. For example, Klarna charges a $7 monthly fee if the consumer misses a payment. For a $500 purchase, a $7 monthly fee equates to an $84 annualized fee or a 17% APR.

The app, Affirm, currently charges no late fees. Instead, Affirm actually charges interest on their small loans.

Afterpay charges an initial $10 late fee but will add another $7 fee if the payment does not arrive within a week of its due date. Afterpay also caps their late fees so that they do not amount to more than 25% of the original purchase amount.

Additional Fees

Besides late fees, some apps and loan services charge “origination” fees, meaning they charge you a fee at the time of purchase, as well as monthly membership fees. Although membership-based apps advertise their low 0% APRs on loans, their membership fees basically raise even these 0% APRs to anywhere from 10% to 50% interest rates, depending upon how much debt you have incurred.

Related Questions

Should I transfer my credit card debt to a low APR personal loan?

While you might qualify for a personal loan with a lower interest rate than your current credit card interest rates, beware of the dangers of running up the balances of the recently-paid off credit cards back up to their previous amounts.

Can I transfer a loan to an interest-free credit card?

If you have a credit card that offers interest-free balance transfers, or if you have excellent credit (typically 750 or 760 FICO or higher), you might qualify for a credit card that offers 0% APR on balance transfers for a limited time. Many credit cards also offer low-interest balance transfers.

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You hereby authorize and instruct Debt Reduction Services, Inc. (DRS, dba Money Fit by DRS) and/or its assigned agents to:
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Client Privacy, Data Security, and Client Rights Policy

NOTE: This sheet is to inform new or returning clients about our services, records, fees, and limitations that may affect you as a consumer of our services. This form also discloses how we might release your information to other agencies and/or regulators. If you do not understand a statement, please ask a Debt Reduction Services (DRS) counselor for assistance.

Debt Reduction Services, Inc. (DRS) has put into place policies and procedures to protect the security and confidentiality of your nonpublic personal information. This notice explains our online information practices and how we use and maintain your information to conduct our financial education and credit counseling sessions and to fulfill information and question requests. This privacy policy complies with federal laws and regulations.

To provide our financial education and credit counseling services, we collect nonpublic personal information about you as follows: 1) Information we receive from you, 2) Information about your transactions with us or others, and 3) Information we receive from your creditors or a consumer reporting agency. We do not share this information with outside parties.

We use non-identifying and aggregate information to better design our website and services, but we do not disclose anything that could be used to identify you as an individual.

You hereby authorize DRS, when necessary, to share your nonpublic personal, financial, credit, and any information that you provided (including any computations and assessments produced) with the following entities in order to help DRS provide you with appropriate counseling or guide you to appropriate services: third parties such as government agencies, your lender(s), your creditor(s), and nonprofit housing-related and other financial agencies as permitted by law, including the U.S. Department of Housing and Urban Development.

To prevent unauthorized access, maintain data accuracy, and ensure the correct use of information, we have put in place appropriate physical, electronic, and managerial procedures to safeguard and secure the information we collect online. We limit access to your nonpublic personal information to our employees, contractors and agents who need such access to provide products or services to you or for other legitimate business purposes.

Debt Reduction Services, Inc. complies with the privacy requirements set forth in the HUD housing counseling agency handbook 7610.1 (05/2010), including the sections 2-2 Mc, 3-1 H(2), 3-3, 5-3 F, and Attachment A.5. At all times, we will comply with all additional laws and regulations to which we are subject regarding the collection, use, and disclosure of individually identifiable information.

  1. Services: DRS provides the following housing-related services: counseling that includes Homeless Assistance, Rental Topics, Pre-purchase/Homebuying, and Home Maintenance and Financial Management for Homeowners (Non-Delinquency Post-Purchase); Education courses that include Financial literacy (including home affordability, budgeting, and understanding use of credit), Predatory lending, loan scam or other fraud prevention, Fair housing, Rental topics, Pre-purchase homebuyer education, Non-delinquency post-purchase workshop (including home maintenance and/or financial management for homeowners), and other workshops not listed above.

Please refer to DebtReductionServices.org for details of our services.

  1. Limits: Our services are limited to our normal weekday business hours. We do not provide individual counseling or education services after hours or on weekends, although our education courses are available 24/7.
  2. Fees: We do not charge fees for our financial management counseling and education. However, if you use them, you may have to pay for our Debt Management Program, Student Loan Counseling, Bankruptcy Certificate Services or certain financial education courses (homebuyer education, rental topics, fair housing, predatory lending, and post-purchase-non-delinquency including home maintenance and/or financial management for homeowners).
  3. Records: We maintain records of the services you receive, including notes about your progress or other relevant information to your work with us. You have the right to access and view your records by making a request to your counselor.
  4. Confidentiality: We respect your privacy and offer our services in confidence with the understanding that we may share such information with auditors and government regulators. Certain laws or situations may also lead to disclosing confidential issues, such as those involving potential child abuse or neglect, threats to harm self or others, or court subpoenas.
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  6. Disclosure of Policies and Practices: You will be provided our agency disclosure statement.
  7. Sharing of Information: Sometimes we will need to contact other agencies or we may need to share your information, including your records, with other agencies or with regulators. We will do this only if you sign this form that gives us permission except for limited reasons; please see # 5 above for examples of such situations.
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You acknowledge that this authorization will remain in effect for the duration of time that DRS serves as your housing counselor or financial education provider. You also acknowledge that should you wish to terminate this authorization, you will notify DRS in writing.

Disclosure  Statement

NOTE: If you have an impairment, disability, language barrier, or otherwise require an alternative means of completing this form or accessing information about our counseling services, please communicate with your DRS representative about arranging alternative accommodations.

Program Disclosure Form

Disclosure to Client for HUD Housing Counseling Services

Debt Reduction Services, Inc. and its financial education arm, Money Fit by DRS, offer the following housing counseling and educational services related to housing, personal finance, and bankruptcy certificates to consumers:
  • Housing Education Courses: DRS offers many online self-guided education programs classified as Financial, Budgeting, and Credit Workshops (FBC), Fair Housing Pre-Purchase Education Workshops (FHW), Homelessness Prevention Workshops (HMW), Non-Delinquency Post Purchase Workshops (NDW), Predatory Lending Education Workshops (PLW), Pre-purchase Homebuyer Education Workshops (PPW), and Rental Housing Workshops (RHW). These courses help participants increase their knowledge of and skills in personal finance, including home affordability, budgeting, and understanding the use of credit, as well as predatory lending, loan scams, and other fraud prevention topics, fair housing, rental topics, pre-purchase homebuyer education, non-delinquency post-purchase topics including home maintenance and/or financial management for homeowners, homeless prevention workshop, and other workshops not listed above relating to personal finance and housing. Course details are found below under “Housing Workshops.”
  • Home Equity Conversation Mortgage (HECM) Counseling (RMC): Via telephone and virtual platforms, we offer the required HECM counseling nationwide in addition to in-person counseling in Boise, Idaho. We also offer in-home counseling options in thirty counties across southern Idaho for an additional fee to cover our travel and additional staff time costs.
  • Home Maintenance and Financial Management for Homeowners (Non-Delinquency Post-Purchase) (FBC): Clients receive counseling and materials on the proper maintenance of their home and mortgage refinancing. Clients can find help and resources by phone, in our Boise office, or virtually on all topics related to stabilizing their long-term homeownership.
  • Services for Homeless Counseling (HMC): Clients receive phone, virtual, or in-person (Boise) counseling to evaluate their current housing needs, identify barriers to and goals for housing stability, establish a path to self-sufficiency, and connect with emergency shelters, income-appropriate housing, and/or other community resources (e.g. mental healthcare, job training, transportation, etc.).
  • Pre-Purchase Counseling (PPC): Clients receive counseling through the entire homebuying process. Assistance may involve creating a sustainable household budget, understanding mortgage options, building their credit rating, and putting together a realistic action plan to set and achieve homeownership goals.  Additionally, clients will receive materials and resources about home inspections and other homeownership topics relevant to successfully maintaining a home.
  • Rental Housing Counseling (RHC): Via phone, in-person appointments (Boise, ID), or virtual platforms, clients receive housing counseling relevant to renting, including rent subsidies from HUD or other government and assistance programs. Topics can also address issues and concerns having to do with fair housing, landlord and tenant laws, lease terms, rent delinquency, household budgeting, and finding alternate housing.
DRS also offers the following services:
  • A Debt Management Program (DMP) for consumers struggling to pay their credit cards, collections, medical debts, personal loans, old utility bills, and past-due cell phone accounts;
  • The Budget Briefing and Debtor Education Certificates that are required during the Bankruptcy filing process;
  • A Student Loan Repayment Plan Counseling and application service.

Relationships with Industry Partners

Through such services, DRS has established financial relationships with hundreds of banks, credit unions, and creditors such as American Express, Bank of America, Barclays, Capital One, Chase, Citibank, Credit One, Discover, Synchrony, US Bank, USAA, Wells Fargo, and others.

No Client Obligation

The client is not obligated to receive, purchase or utilize any other services offered by DRS or its exclusive partners to receive financial education or housing counseling services. Alternatives: As a condition of our counseling services, in alignment with meeting our client services goals, and in compliance with HUD’s Housing Counseling Program requirements, we may provide information on alternative services, programs, and products available to you, if applicable and known by our staff. Alternative DMP services include negotiating better repayment terms directly with your individual creditors, paying your debts as agreed, or, in extreme cases, filing for personal bankruptcy. Alternative credit and education services can be found through MyMoney.gov or the Jump$tart Clearinghouse of online financial education resources. Housing counseling alternatives can be found through HUD at www.hud.gov/findacounselor.
Finally, you understand that you may revoke consent to these disclosures by notifying DRS in writing.

Housing Counseling and Education Fee Schedule

 

Online Education Program Fees*

Homebuyer Education Course: $59 per participant

  • Self-paced course available here, our online housing counseling and education center. Certificates will be automatically generated upon completion of the course (approximately 6-8 hours)

RentalFair HousingPredatory Lending / HOEPAPost-Purchase (Non-delinquency post-purchase workshop, including home maintenance and/or financial management for homeowners) Online Workshops: $49 per participant

  • Approximately 1 hour each

Other Self-Guided Financial Literacy Webinars (e.g. creditbudgetinghomeless preventiondebt prevention): $0

One-on-one Counseling Fees*

Pre-purchase Homebuying Counseling, Rental Counseling, Post-purchase Ownership Maintenance and Financial Management: $75

  • Session by the hour

Reverse Mortgage/HECM Counseling with Required Certificate:

  • $200†

Credit Report Fee: Paid Directly by Client

*Fees for all but our online education courses and workshops can be paid online by debit card, credit card, or PayPal or in person by cash, check or money order to: “Debt Reduction Services, Inc.” Registration fees are non-refundable 24 hours or less before the start of an in-person course or workshop. Certificates are non-transferable

*Fees may be waived for households with income of 150% or less of that identified on the US Department of Health and Human Services Poverty Guidelines Page

†Home visit counseling is available in 30 southern Idaho counties for potential HECM borrowers at additional costs to cover our travel (IRS reimbursement rates apply) and staff time ($50 per hour or fraction there).

Housing Counseling and Education Fee Schedule

 

Online Education Program Fees*

Homebuyer Education Course: $59 per participant

  • Self-paced course available here, our online housing counseling and education center. Certificates will be automatically generated upon completion of the course (approximately 6-8 hours)

RentalFair HousingPredatory Lending / HOEPAPost-Purchase (Non-delinquency post-purchase workshop, including home maintenance and/or financial management for homeowners) Online Workshops: $49 per participant

  • Approximately 1 hour each

Other Self-Guided Financial Literacy Webinars (e.g. creditbudgetinghomeless preventiondebt prevention): $0

One-on-one Counseling Fees*

Pre-purchase Homebuying Counseling, Rental Counseling, Post-purchase Ownership Maintenance and Financial Management: $75

  • Session by the hour

Reverse Mortgage/HECM Counseling with Required Certificate:

  • $200†

Credit Report Fee: Paid Directly by Client

*Fees for all but our online education courses and workshops can be paid online by debit card, credit card, or PayPal or in person by cash, check or money order to: “Debt Reduction Services, Inc.” Registration fees are non-refundable 24 hours or less before the start of an in-person course or workshop. Certificates are non-transferable

*Fees may be waived for households with income of 150% or less of that identified on the US Department of Health and Human Services Poverty Guidelines Page

†Home visit counseling is available in 30 southern Idaho counties for potential HECM borrowers at additional costs to cover our travel (IRS reimbursement rates apply) and staff time ($50 per hour or fraction there).