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What is Buy Now, Pay Later?
Key Takeaways
- Buy now, pay later services let you pay for a purchase over time, including biweekly or monthly installments.
- Some buy now, pay later services come without interest or fees, but it can depend on the company, your credit and the cost of your purchase.
- Be cautious when using buy now, pay later services so you don’t end up spending more than you can afford.
The fun part of online shopping is clicking the “add to cart” button, but figuring out how to pay for the purchase is not. Buy now, pay later (BNPL) is a service designed to let you pay for a purchase over time, usually by dividing the payment into installments, such as biweekly, monthly, three-, six- and 12-month repayment plans. For large purchases, some BNPL companies will let you choose installment plans that can last as long as four years. Whether you’ll pay fees and interest on a BNPL purchase depends on which company you use.
Before you use BNPL to check out, learn more about how this method works, how much it may cost you and what you should look for.
What Is Buy Now, Pay Later?
Buy now, pay later is a type of short-term financing that allows consumers to buy products and spread out payments over time, often with no interest. It’s similar to a layaway plan, but with a twist. Instead of receiving your purchase after completing a series of installment payments, you’ll get the product upfront. Companies that offer BNPL include Klarna, Affirm, Sezzle and PayPal.
How Does BNPL Work?
Your experience with buy now, pay later will vary depending on the company you choose, but here’s what you can generally expect:
- When you’re ready to check out online, you may see an option to break up your purchase over several installments. Or, when shopping in person, you can use a BNPL app to pay.
- If you want to use BNPL, you’ll need to fill out a short application. The BNPL provider may perform a soft credit check, which won’t affect your credit score.
- If you’re approved, you may need to make the first payment when you check out.
- The balance is split into a series of installments that are usually due two weeks or a month apart. Terms may vary depending on the payment plan you choose.
- Depending on the BNPL company, you might make automatic payments with your credit card, debit card or bank account. Some BNPL servicers may also let you pay down your balance with a check or a bank transfer. But expect most BNPL companies to only offer autopay. Also, be sure to check the terms and conditions of your loan to see whether there are late fees or other charges.
Does BNPL Affect Your Credit Score?
Buy now, pay later services are a form of credit, so they may affect your credit score. It depends on the service, the type of installment plan you choose and how you manage the payments. Applying to use a BNPL service usually doesn’t affect your credit because most of these companies do not perform a hard credit check.
But as you use begin to make use of the services, the BNPL provider may or may not report information to the credit bureaus. Affirm reports account balances and payment history to Experian for some loans, while Sezzle customers have a choice in the matter.
Information that’s reported to the credit bureaus can factor into your credit score, so making on-time payments is important if you want to increase your credit score. On the other hand, if you’re making late payments or missing any, your credit may take a hit.
Unfortunately, “it’s easier for consumers to spend more than they can afford to when using BNPL platforms,” says Leslie Tayne, a New York-based debt resolution attorney and personal finance expert. In a 2022 Credit Karma survey, conducted by software firm Qualtrics, less than 20% of 1,028 respondents who used buy now, pay later services reported that they fell behind on one or more payments. And many BNPL users – 40% to be exact – have an outstanding balance. Those carrying a balance owe an average of $665, while 20% of respondents reported owing more than $1,000. Finally, among those who missed at least one payment, 33% reported seeing a decrease in their credit scores afterward.
But even when you manage payments responsibly, BNPL can ding your credit if each purchase is listed as a separate account on your credit reports, says Tayne. New accounts lower your average age of credit, which can lower your credit score.
Will You Pay Interest and Fees?
Although BNPL services may tout their offerings as low-cost, they can charge interest and fees. Any fees, interest and penalties should be outlined in the terms of the loan, so read the fine print before agreeing to take out the loan.
Affirm never charges fees but does charge an annual percentage rate between 0% and 30% based on the customer’s credit. Klarna’s short-term plans don’t charge interest, but customers pay an interest rate between 0% and 29.99% on longer financing options. Additionally, the company can charge up to 25% of the order’s value in late fees. Afterpay and Klarna do not charge interest on short-term financing but may also charge late fees up to 25% of the order’s value.
Other costs may come into play, too, depending on how you make payments. Your credit card issuer may charge interest if you don’t pay off your balance in full, while your bank may charge an insufficient funds fee if the payment pushes your checking account balance into the negative.
Does BNPL Offer Consumer Protections?
Buy now, pay later services lack many consumer protections that come as a standard with other forms of credit. The Fair Credit Billing Act (FCBA) allows consumers to dispute billing errors with credit card issuers, and credit card holders may also be able to take legal action against the seller and the card issuer if there’s a problem with a fraudulent charge or the quality of a good or service. However, FCBA protections don’t apply to installment contracts like buy now, pay later.
With BNPL services, you may have a harder time getting a refund when you return an item, for instance. Before using a BNPL service, read and understand the company’s policies.
Buy Now, Pay Later Options
| Service | Terms | Interest | Fees |
| Affirm | Pay in four equal installments with no interest, or choose monthly installments for big-ticket items. | 0% APR with the four equal installment plan, or 0% – 36% APR, depending on credit. | No fees. |
| Afterpay | Pay in four installments with no interest, or make monthly payments for six or 12 months for purchases over $400. | No interest when paying in four installments, or 6.99% – 35.99% when paying monthly, depending on eligibility and merchant. | Late fees (capped at 25% of the order value). |
| Apple Pay Later | Pay in four equal installments for purchases of $75 – $1,000 made with Apple Pay on an iPhone or iPad. | No interest. | No fees. |
| Klarna | Pay in four installments, pay 30 days later or finance a purchase for six to 24 months. | No interest for paying in four installments or 30-day plans; 7.99% – 33.99% for long-term financing. | Late fees of up to $7 (capped at 25% of the order value). |
| PayPal | Pay in four installments or finance for six, 12 or 24 months. | No interest for paying in four installments; 9.99% – 35.99% APR for monthly plans. | No fees. |
| Sezzle | Split your payment into two or four installments, or choose a monthly payment plan that can go up to 48 months. | 0% APR for paying in two or four installments; 5.99% – 34.99% APR on monthly plans. | Reactivation fee up to $15; rescheduled payment fee up to $7.50; convenience fee up to $1.50 on payments made by debit or credit card. There are no fees on automatic ACH payments. |
| Uplift | Divide your purchase into fixed monthly installments. | 0% – 36% APR depending on credit, purchase details and other factors. | No fees. |
| Zip | Split your purchase into four payments. | Depends on purchase amount and installment fee. | Installment fee up to $7.50. |
What Are the Pros and Cons of Buy Now, Pay Later?
Pros
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Often no credit impact when you apply. Buy now, pay later services may perform a soft credit pull – or skip the check altogether – which means your credit won’t be negatively affected.
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No interest or fees. Depending on the BNPL company and the payment plan you choose, you may not pay interest or fees on your purchase.
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Alternative to other forms of credit. This could be beneficial if you want to avoid using your credit cards.
Cons
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Extra charges. Some BNPL plans charge interest, and you may be on the hook for late fees if you miss a payment.
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Potential credit impact. You forgo the chance to build positive credit if the BNPL company doesn’t report on-time payments to the credit bureaus. But if the company does report to credit bureaus, late payments can ding your credit score.
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Temptation to overspend. BNPL payment plans can make it easier to buy things you can’t actually afford. In a March 2021 Lending Tree survey of American consumers, two-thirds of BNPL shoppers said they spent more than they would have without the buy now, pay later option, and 47% said they wouldn’t have made their purchase if BNPL wasn’t offered.
When Should You Choose Buy Now, Pay Later?
Generally, “using buy now, pay later for higher-cost items isn’t a bad thing if you have it properly budgeted in and you’re not overusing it,” says Michael Kelly, a certified financial planner, chartered financial analyst and partner and chief investor officer at Reach Strategic Wealth.
Buy now, pay later might be a good option for expensive items if you had already planned to use your credit card to cover the purchase. When you charge any purchase to your credit card, it takes up a portion of your credit limit and increases your credit utilization, which can lower your credit score. If you use a BNPL plan and put installment payments on your credit card, you’ll use a smaller amount of your credit limit for each payment.
Just make sure you can follow the payment schedule, Kelly says. You can plan this out by checking the payment dates and figuring out whether you’ll have room on your credit card or enough cash in your bank account. It’s also a good idea to have a well-stocked emergency fund that you can dip into if you’re in danger of missing a payment.
On the other hand, there are good reasons to pay for your purchase all at once with a credit card. Credit cards come with more consumer protections than BNPL plans, and they can also offer benefits such as extended warranties and trip insurance.
A credit card might also be the better option if you qualify for a 0% introductory APR, which often lasts 12 to 18 months from account opening. Instead of signing up for a BNPL installment plan, you could essentially create your own by charging the purchase to your 0% APR credit card and paying it off before the introductory period ends.
Buy Now, Pay Later Alternatives
Buy now, pay later may not be worth it for you, especially with the potential of a high APR for longer installment plans. The catch with BNPL is calculating whether there’s another, less expensive way to make your purchase. Keep these alternatives in mind the next time you go to check out:
- Pay in cash. The best way to ensure you’re not paying additional fees or finance charges to make a purchase is to pay with money you already have.
- Use your credit card. If you have a credit card, you may save money putting the purchase on your card, but it’s important to remember to pay your balance in full before the due date to avoid interest charges.
- Choose a secured card. Another option, and one which may help improve your credit score when used responsibly, is to use a secured credit card. Secured cards let you charge purchases up to a set credit limit, which is usually the amount of your cash collateral.
- Consider a 0% APR card. A credit card with an introductory 0% APR allows you to finance a purchase over many months without interest, as long as you pay it off before the introductory period ends.
- Take out a personal loan. For larger purchases, such as travel, you may qualify for a lower APR with a personal loan than you would using a BNPL service. Compare multiple lenders to find the one with the best rates before taking out a personal loan.
- Skip or delay the purchase. If you can’t buy an item without financing it, consider whether you can delay the purchase until you have the funds or skip it altogether. Sometimes waiting a few days is enough to make even the most eager shoppers reconsider.
