For Holiday Shoppers, 'Buy Now, Pay Later' Services Are A Hot Option

CHICAGO (CBS) -- Ah the good old days – you'd buy something at a store, not on a computer, and the cashier would ask, "Will that be cash, or credit?"

Today, one of the hottest payment trends is, "Buy now, pay later." So what does that mean?

CBS 2's Tim McNicholas sorted through your options for holiday shopping.

"It's growing so much that banks are staring to copy them," said Ted Rossman, an industry analyst with CreditCards.com.

He is talking about "buy now, pay later" companies like Klarna, Affirm, an Afterpay. They all have slick websites and a similar premise.

Take this example from Affirm – you buy something for $1,000, and instead of forking over the cash now, you can pay $333 a month for three months. It amounts basically to an interest-free loan.

If you need six or 12 months to pay, you might pay 14 percent interest.

"People really like seeing it spelled out. It incentivizes to spend more, which is a downside from a consumer side," Rossman said. "Retailers love it."

If you think you can pay off that PlayStation or trip in a few weeks or a month, then you can get yourself a short-term interest-free loan.

Sometimes, those loans can last longer. Take the wildly popular, and expensive, Peloton - they have a deal for 0 percent interest with Affirm for three years.

The $1,900 bike then becomes only $49 per month.

"You need to do the math and know yourself," Rossman said. "A monthly payment sounds less than a big sticker price."

None of the "buy now, pay later" services come with many of the benefits of a credit card.

"The best thing you can do is use a credit card and pay it off before interest hits – better rewards, extended warranty, purchase protection," Rossman said.

That's a big if. Can you pay off the balance before that 15 to 20 percent interest kicks in?

Some major banks also want you to "buy now, pay later" using the card already in your wallet. But beware of the costs.

"They technically don't call it interest; call it plan fee," Rossman said. "Let's face it – it's basically interest, but at a lower rate."

Rossman pegs the plan fees at 7 to 10 percent – again lower than typical credit card interest, but still well above zero.

And just remember – how ever you pay for that perfect gift, you will, in fact, have to pay – whether now, or later.

Debit cards and cash keep you out of debt, but don't offer the same consumer protections and rewards as credit cards.

Rossman also warns that store credit cards often carry very high interest rates like 25 percent.

He also advised to beware of those 0 percent interest promos on store cards because they also often have a gotcha – if you don't pay back the balance by a certain date, you'll owe interest going all the way back to the date of purchase.