PayPal might be overly tempting

Deferred billing plan offered by eBay could lead to overspending

On The Money

Your Money

September 12, 2004|By Lorene Yue

These days, you can buy just about anything and worry about paying for it later.

Deferred billing is hardly a new concept, but more and more merchants -- from consumer-electronics sellers to office supply stores -- are offering buy-now-pay-later options.

Not to be outdone, PayPal, the electronic commerce payment service owned by online auction giant eBay Inc., has joined the game with its version of special financing. It's part of the PayPal Buyer Credit program introduced in late June so that eBay sellers could compete with financing deals offered by such traditional retailers as Best Buy, said PayPal spokeswoman Amanda Pires.

PayPal joined GE Consumer Finance to create a "line of credit" for PayPal users, a sort of credit card without the plastic card. There's still an application process, and your credit limit is determined by your creditworthiness.

Traditional PayPal lets buyers pay for online purchases using a credit card they have, a bank account number or stored balances. PayPal's fees are paid by the seller. If the new credit program catches on, it will mean additional revenue for PayPal and GE Consumer Finance through possible interest rate charges and additional fees.

Ebay merchants want to lure you in by offering special financing deals that might not cost you a cent if you pay on time. If you don't get one of those deals, or get one and fail to live up to it, you'll be paying roughly 20.8 percent interest for the privilege. Because it's a variable rate, it can increase or decrease. It will jump to a 24.75 annual percentage rate if you miss a couple of required payments.

That interest rate is typical for the retail industry, said Jim Daly, editor of Credit Card Management, a monthly publication, but it's much higher than on the bank cards you would ordinarily use with PayPal. Those rates hover in the low teens.

There's a cost for the eBay seller, too. A seller who wants to offer a special finance deal on an item selling for $199 or more will pay PayPal a fee of 0.5 percent to 3.75 percent of the total purchase price, if the buyer opts for the payment plan. (The actual amount depends on the terms of special financing.)

That is on top of the 1.9 to 2.9 percent plus 30 cents that PayPal takes as a fee on each transaction for accepting credit-card payments. So if a buyer takes a special financing deal of a year of fixed payments at 12.9 APR on a $1,000 purchase, the seller will pay $6 for the financing and up to $29.30 for using PayPal.

Here's a rundown of other things you might want to know about PayPal's credit program.

What about other PayPal financing deals?

Other choices include:

No payments and no interest for three months for total purchases of more than $199.

No interest if paid in six months, or 12 months for total purchases of more than $199.

Twelve fixed monthly payments at 12.9 APR on total purchases of more than $999.

Twenty-four fixed monthly payments at 12.9 APR on total purchases of more than $1,999.

How do I get those deals?

It has to be offered by the seller; you can request the incentive if it isn't being offered.

Who takes the risk?

The seller is paid in full by PayPal (minus fees, of course). The buyer ends up making payments to GE Capital Consumer Card.

Are there any downsides?

Consumer advocates cringe at the prospect of taking on more debt.

"If you are a person with good credit, why do you need another line of credit?" said Liz Pulliam Weston, whose book Your Credit Score (Financial Times Prentice Hall, $17.95) is due out in November. "I constantly tell people to leave it alone. They probably have more credit than is needed."

What makes her worry?

There is the temptation to overspend and potentially bite off more than you can chew. And because the program isn't limited to eBay purchases -- it's available to any merchant that accepts PayPal payments -- it opens more doors to overshop.

"A lot of people say, `I'm using somebody else's money for free,'" Weston said. "I come back at them with, `What are you doing to your credit history?'"

Every time you apply for a line of credit (whether you get it or not), you can sink your credit score a couple of points, which can drive up the interest rate the next time you need any kind of loan.

What if I can't make the payments as agreed?

If you fail to pay off the total purchase amount by the agreed-upon time, you'll get hit with interest charges from the day of the sale. So, if you bought a $200 digital camera on eBay and opted for the six-month, no-interest plan, but still owed $10 at the end of the six months, you'll get socked with a 20.4 APR on the $200.

-- Lorene Yue is a Your Money staff writer.

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