What Is Buy Now, Pay Later?

woman buying clothing in store

Buy now, pay later (BNPL) programs offer consumers short-term loans to make purchases and pay them back over time. These programs have become increasingly popular, especially with the rise in online shopping during the pandemic. 

Much like a credit card, using BNPL programs allows the customer to buy things like clothing, electronics or even groceries and divide the purchase into multiple payments. 

Buy now, pay later apps offer a convenient way to make purchases and budget around a repayment schedule. But it’s essential to understand how BNPL works and the potential problems. 

Who is buying now and paying later?

A Juniper Research study anticipates BNPL users will exceed 900 million worldwide by 2027. Apps like Affirm, Klarna, Sezzle, Zip and Afterpay are on the check-out screens of popular store websites. Apple Pay and Paypal are introducing BNPL programs as part of their existing platforms. 

Credit card companies like Chase and American Express are even developing their versions of buy now, pay later, potentially with lower fees or interest rates than a standard variable rate credit card.

Unlike a credit card, which will enable you to vary your monthly payment amount as long as you meet the minimum balance due, BNPL programs set a repayment schedule that you must adhere to or risk being charged a fee or interest.

Many buy now, pay later companies may not charge interest or fees if users make their fixed-schedule payments on time and in full. Some BNPL companies charge interest, however, and may charge an annual percentage rate of up to 30% for some plans. 

How does buy now, pay later work?

If you haven’t tried buy now, pay later, think of it as an instant loan for small purchases. When you are approved and use BNPL at checkout, the company immediately pays the store the amount of your bill. 

Then, you pay the company back on a fixed schedule, usually with several payments spread out over six weeks. Some companies also offer longer-term repayment options, potentially with interest applied to the amount borrowed. 

The store will often share a part of your total purchase price with the buy now, pay later company for helping them make the sale.

How do I sign up for BNPL?

If you decide to use buy now, pay later, you’ll likely complete the following steps on your phone or in person at a store:

  1. Select the BNPL option during checkout. 
  2. Click on the link and fill out a short application. You will likely have to provide information similar to applying for a credit card like:
    • Your full name
    • Social Security number
    • Phone number and email address
    • Residential address
    • Birthdate
    • A payment method like a debit or credit card

A decision should be made within a few seconds. Many buy now, pay later companies only do a soft credit check, which shouldn’t affect your credit score. But some companies do a hard pull on your credit, which can temporarily drop your score by a few points. 

Many use BNPL because people with bad credit or no credit can more easily qualify for a BNPL program, where they wouldn’t necessarily qualify for a credit card or personal loan.

Once approved, you’ll have to provide a small down payment and field options for repaying the rest. One popular repayment plan is the pay-in-four. It requires you to make an upfront payment of 25%, and the remaining three installments of 25% are due in two-week increments from the date of purchase.

Pay attention to the fine print

Before making any purchases with a buy now, pay later service, make sure that you read the terms of the loan. Available repayment plans differ by company, so even if you’re familiar with one program, it doesn’t mean you understand all of them. 

Pay particular attention to any interest or fees you may have to pay if you miss a scheduled payment. Although the company may not charge you interest if you pay on time, they could start charging interest and add a hefty fee if you’re late making a payment. Some companies even limit your available spending balance when you have an outstanding amount. 

According to CNBC, many of these lenders don’t typically report your on-time payments and good credit history to the three credit bureaus. Some may report a late payment, possibly damaging your credit score. If you’re working on building your credit to buy a house or car, make sure a late BNPL payment doesn’t derail your efforts. 

Using a BNPL program can also make items harder to return. There are reports of customers completing a return in the store but still having to pay their bi-weekly amounts until the return has been accepted and processed by your BNPL company. 

Is buy now, pay later a good idea?

If you do use a BNPL loan, try to avoid overspending. Consulting and analytics company The Strawhecker Group reports, of those who missed a payment, 54% of BNPL users spent more than if they used other payment methods. 

People who like using buy now, pay later programs say they want to avoid credit card interest or enjoy flexibility by delaying the payments for their purchases.

Remember that unlike with credit cards, where you can pay only the minimum amount if you’re having a lean month, you must pay the amount due in full for a buy now, pay later loan. You also won’t be able to earn cashback or rewards like you would with a credit card.

Because BNPL can be so easy to qualify for and use, you can quickly fall into an impulse spending trap that leaves future-you with multiple payments to make.

Alternatives to buy now, pay later

If a buy now, pay later plan doesn’t sound like a good option, there are alternatives to help you make necessary purchases without breaking your budget. 

Pay with your debit card. This may be obvious, but paying with a debit card (or cash) is the easiest way to avoid paying interest. You don’t have to worry about interest or late fees, but it does mean you have to plan and have the cash on hand. It can take longer to make large purchases this way since you have to save up, but at least you know you are free and clear once you make the purchase.

Use cashback rewards. Save your credit card reward points throughout the year to help supplement your holiday or fun-money budgets. Make sure you don’t buy things just for the cashback rewards, since that’s a good way to get into debt. If you were going to use a card anyway, make sure it gives you cashback on every purchase and pay off your credit card balance in full every month.

Use a credit card with 0% APR. If you already have a credit card that isn’t charging you interest for a year or more, this can be a great alternative to buy now, pay later services. While you shouldn’t apply for a new credit card just to rack up debt, if you need to make a purchase immediately, a credit card with a 0% introductory interest rate can help you avoid paying more than you have to. Just make sure you know how long the initial rate is for and have a plan to pay the balance in full before that rate expires. 

Bottom line

According to a study done by market research company, Cardify, 45.1% of users said that they used BNPL programs to purchase some or all of their holiday gifts in 2021. Although this service can make it convenient to get what you need and have a little breathing room, be sure to understand what you’re signing up for. Consider using alternatives to a buy now, pay later program. If you do choose to use one, make sure you can afford the payments according to the installment plan. 

Photo by Jacob Lund/Shutterstock

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