How Buy Now, Pay Later Programs Work (and Sometimes Don’t)
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One great thing about buying something on credit is that you can immediately get what you want without paying the full cost.
A new couch, computer, dress you want for a party next week, or just about any expense, can be easier to afford with installment payments. Or at least it is until the interest charges arrive because you missed payments or didn’t pay the credit card bill in full when it was due.
“Buy now, pay later” loans, or BNPL, through apps such as Affirm, Afterpay, Zip, Sezzle, and Klarna, are replacing credit cards for some consumers. The apps offer the ability to pay off purchases over time with no interest. They’re a way to avoid taking on more credit card debt.
Users can avoid interest charges by making the required payments over a month. However, being late with payment can result in a late fee, which can be difficult to fix after returning an item, among other problems consumers have reported with BNPLs.
Here, we’ll go over how BNPLs work, their benefits and downsides, and a few companies you may want to try as a payment method.
In this article
What is Buy Now, Pay Later?
Buy Now, Pay Later (BNPL) is a deferred payment option that generally allows people to buy things without spending money upfront, followed by installment payments.
They may sound like layaway, credit cards, rent-to-own, and other types of loans, but BNPLs differ in a few ways.
You may see offers for BNPL installment plans pop up when trying to buy something online. Or you can set up a loan yourself through a BNPL company app. If approved, your purchase is split into a payment schedule, usually four fixed payments made every two weeks or monthly until the balance is paid off.
No interest or finance charges are charged to you, though late and other fees may be imposed.
- Access up to $750 per pay period
- No interest, mandatory fees, or credit checks
- Over 15 million downloads and counting
How to qualify for BNPL
Approval for a buy now, pay later loan can only take a few minutes. A hard credit inquiry won’t be made, as it usually is for credit cards or other types of loans. Instead, the basic requirements will likely be:
- Age 18 or older
- Have a mobile phone number
- Have a debit or credit card to make payments
- The BNPL company can validate your identity
BNPLs and your budget
Like any consumer credit product, you should make sure you can afford a BNPL. According to one survey, they’re popular, with 35% of Americans using BNPL at least once. That may be because a credit check isn’t required, which can cause people with poor credit to get these loans. After all, they’re easy to qualify for.
But just because you can qualify doesn’t mean you should use BNPL. Buying a new electronic gadget may not fit your budget no matter how long you take to pay it off, though eight weeks of payments may seem easier to handle than one payment at the cash register.
Can you afford the purchase?
If the purchase fits in your budget and you need a little more time to raise the money, such as a paycheck coming in a few weeks, then a BNPL can be a good way to avoid paying credit card interest rates.
Just make sure to pay it off by the final due date and make all of your payments on time. If not, you ’ll likely be charged extra fees.
Downsides to BNPLs
They won’t help your credit
You may assume that BNPLs will help you establish or raise your if you pay them off in full on time. Most won’t because most BNPLs don’t report to the credit bureaus, thus affecting your credit score.
Research the BNPL company you’re considering to see if it reports to the credit bureaus. If it does, late payments and other bad habits will be reported, which could hurt your credit history.
Late fees
Most BNPLs don’t charge interest, but there are late fees if you miss a payment.
Of course, no one takes out a loan, especially a short-term one, intending to miss a payment. Being late with a payment by only a day or so isn’t usually intentional.
But things happen, and sometimes, you forget or just can’t make a loan payment when you need to. That can result in a $20 late fee.
This unpaid debt can lead to many problems beyond late fees. You may be blocked from making other BNPL purchases, your debt could be sent to a debt collector, and your bank may charge you an overdraft or additional fee if you have an automatic payment set up but don’t have enough money in your bank account to cover the payment.
Then, the interest rates start
Missing a payment can lead to more trouble than a late fee. Interest rates of up to 29.99% can kick in, and you may be charged the entire purchase amount. Credit cards only charge interest on the remaining balance.
Fewer protections
BNPLs don’t have the same consumer protections that credit cards do. These include:
- Dispute protections that credit cards have if you buy something faulty or a scam.
- Easy merchandise returns like most credit cards have.
- You’re responsible for the total cost even after you’ve returned a product bought through BNPL.
One BNPL shopper told NBC News that she continued to be charged for months for a $1,000 Sears stove order she canceled and never received. Someone told NBC that he paid off a faulty air conditioning unit he returned to Walmart because he feared his account being sent to collections.
Overspending
Impulse buying and overspending are easier with BNPL plans. With a promise of no interest charges, unless you’re late making a payment, a BNPL makes putting off paying for something easy. Just pay it off in four equal payments.
Paying $60 four times sounds much easier than paying $240 once.
This type of thinking can lead you to buy more “wants” than “needs” and can make a big, fun purchase look more affordable than it is.
- Access up to $750 per pay period
- No interest, mandatory fees, or credit checks
- Over 15 million downloads and counting
Upsides to BNPLs
The biggest and most obvious upside to pay-later services is that they are exactly what their name suggests: you buy something now and pay later. Who doesn’t want that?
Retailers often offer this interest-free option to consumers to make whatever they’re selling look affordable. Four equal payments of $60 look much cheaper than one upfront payment of $240 for an Apple watch.
If that fits your budget and lets you pay for a new watch over two months instead of using the “pay now” option, then a BNPL can be worthwhile. This is especially true of large purchases, where a payment plan over a few months can make it easier to afford a refrigerator or stove.
Another upside is that your credit score won’t be checked. A soft credit check will be done, which won’t hurt your credit score. But a hard credit check won’t be pulled, which can lower a score.
Pay later services are more likely to accept customers with bad credit. A poor credit history probably won’t prevent you from getting the loan, which is good if you don’t miss any payments.
Best BNPL companies
Merchants add payment options all of the time, and BNPLs are some that have gained ground in the last few years as more shoppers found them online. Here are six BNPL companies among the many that seem to be popping up almost daily:
Affirm
Affirm’s best feature is that it provides loans of up to $17,500, making big purchases over long terms easier to finance. It has loan terms of four interest-free payments every two weeks or monthly.
Most BNPL apps have four payment schedules, meaning one payment is due at purchase and three more every two weeks or so when you’re paid. They last about six weeks.
Affirm says it never charges late, annual, or random fees. Instead, it says it makes money through commissions, charges businesses, and that shoppers pay interest on some items.
Do stores that do business with Affirm and pay its commissions pass those expenses on to customers? There’s no way of knowing, but we’re guessing they are.
Klarna
Klarna has a “Pay in 30” plan where the principal is due 30 days later or “Pay in 4” plan where you pay four interest-free payments every two weeks.
This can be useful if you have an immediate purchase need, such as a bed, but don’t have money for a down payment. Instead, you’ll get your paycheck in a few weeks and can pay off the bill in full when it is due in a month.
However, Klarna is now subscription-based, and you'll pay $7.99 monthly for this "convenience."
Klarna also offers a credit account. It works like a credit card, with interest charged on balances that aren’t fully paid off by each month's due date.
LutherSales
LutherSales is owned by Luther Appliance & Furniture Sales Acquisition and offers buy now, pay later financing for furniture, appliances, computers, TVs, jewelry, electronics, and more.
Qualifying is based on your work history, not your credit score, the company says. No credit card is needed, and it doesn’t charge setup fees. Delivery is free.
Payments are automated and automatically deducted when linked to your checking or savings account.
If you don’t qualify for its BNPL program, Luther Sales offers credit financing and other payment options. One must pay for something in full within six months of delivery, save 25% off the list price, and not pay interest. It also offers at least a 10% discount for paying for an order completely before delivery.
Afterpay
Afterpay promotes itself as a “pay in four” plan to buy gifts for yourself or someone else. Afterpay probably isn’t where you will buy essentials such as kitchen appliances or furniture.
Its partners sell luxury fashion brands for beauty supplies, home decor, and clothes. It also has links to Black-owned businesses for online purchases.
Afterpay works like many buy now, pay later apps do. You immediately make the first of four payments, then pay the balance off over six weeks without being charged interest.
The app has spending limits, which can gradually increase with on-time payments. If you miss a payment, Afterpay pauses your account until you’ve made the payment.
Sezzle
Sezzle has the normal four-payment plan many BNPLs have, with no interest or fees for on-time payments.
What sets it apart is its payment rescheduling offer. Users can move their remaining payments back by up to two weeks. This can be useful if you’re short on cash or have a financial hiccup and need two more weeks to pay the Sezzle charges off.
This rescheduling can be done up to three times per order. The first reschedule is free, and the second and third are $5 each.
When doing the first rescheduling for free, check the box that allows all future payments for the order to be rescheduled at no charge. You'll be charged a fee if you don’t select this option and need to reschedule them later.
Zip
Most BNPL apps are for online purchases. Zip does that, too, wherever Visa is accepted, but it also works well for in-store shopping. You may know Zip by its previous name, Quadpay.
Instead of shopping through the app, you tell Zip which physical store you’re at and how much you need to pay, and it instantly gives you a virtual Visa card to use at that store. The Zip Visa card can be stored in your phone through Apple Wallet or Google Pay.
Like most other BNPL plans, Zip charges four equal installments over six weeks with no fees or interest when payments are made on time. Only a soft credit check is done, but they charge a $1 convenience fee on every payment. It also has a late fee of $5, $7 or $10.
Paypal
Paypal’s new “Pay in 4” program allows you to split a big purchase into four easy payments. With this model, you make a small down payment at check out and then make a follow-up payment once every two weeks until your purchase is paid in full. Best of all, if you make your payments on time, they’ll be interest-free.
- Access up to $750 per pay period
- No interest, mandatory fees, or credit checks
- Over 15 million downloads and counting
Costs of BNPL
Here are some of the fees BNPLs charge. Most can be avoided by paying the balance off by the due date, usually six weeks after your purchase, and by not missing any payments.
Late fees
A late fee of $20 is standard. Klarna charges up to $35 late payment fee on its credit account. Afterpay caps late fees at 25% of the purchase price for orders below $40. For orders $40 and above, a partial late fee of $10 will apply, and another fee of $7 will apply if the order remains unpaid for a week after the due date.
Returned payment fees
In its 30-day payment option, Klarna charges $27 for insufficient funds in your checking account or other bank account used to pay Klarna. According to Klarna, this fee won’t exceed the total amount you owe.
Credit card charges
Some BNPLs work like a credit card on some purchases if you choose this option. Klarna offers a credit account that charges 19.99% APR on standard purchases. The due date is at least 23 days after the close of each billing cycle. No interest is charged if the balance is paid by each month's due date.
Pros and cons of BNPL
Pros
- If you have a history of paying your debts off on time and in full, then a buy now, pay later option can make affording something easier with four payments spread over six weeks.
- If your bank account is almost empty and you won’t be paid for two more weeks, BNPL can let you buy what you need now and pay it off when your paycheck arrives.
- Consumers without credit cards can use BNPLs as a short-term type of credit.
Cons
- If you buy something now and don’t pay later through a BNPL app, you’ll be charged a late fee, interest as high as 30%, and your credit score may fall. The account could be sent to a collection agency and if you still don’t pay, your future paychecks could be deducted from by the creditor to pay off the balance.
- Late fees and interest are some of the main ways BNPLs make money, and they can make a short-term loan for a shirt or anything else more expensive.
- BNPLs can encourage mindless shopping, so be aware of what you’re buying and what you can afford before using one.
- Access up to $750 per pay period
- No interest, mandatory fees, or credit checks
- Over 15 million downloads and counting
FAQs
Is buy now, pay later the same thing as layaway?
Not entirely. Although both BNPL services and layaway involve making installment payments on an item, the process is a bit different. With layaway, you won’t receive your purchase until you’ve paid for it in full. With BNPL programs, your order will be processed as soon as you make your initial down payment.
How are BNPL programs different from paying on a credit card?
With a credit card, you’ll be charged the full amount for the item, whereas with BNPL programs, you’ll be charged in installments, Plus, as long as you make your installment payments on time, you likely won’t be charged any interest. In contrast, credit card interest charges can be high, which increases your chances of going into credit card debt.
What happens if I can’t pay off my installments?
If you can’t pay off your installments, you’ll be charged a late fee and, eventually, your account will be sent to collections. Unfortunately, having an account go into collections will show up on your credit report and affect your credit score.
The bottom line
If you can stick to a repayment schedule that’s typically six weeks long, then a buy now, pay later plan can make paying for something easy.
It can also make shopping too easy. Like a credit card, a BNPL can put your Christmas or other shopping bills off for a month or more, and you could end up paying interest and late fees for things you probably never thought would put you into debt.
BNPLs can make your personal finances easier or harder. It’s your choice, so pay attention to the due dates and try not to spend more than you can afford.
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Writer
Aaron Crowe is a freelance journalist who specializes in personal finance writing and editing. He has worked at newspapers, where he won a Pulitzer Prize, and has written for numerous online publications. These include AOL, US News & World Report, WiseBread, Bankrate, AARP, and many websites focusing on housing, credit and insurance. He lives in California with his wife and daughter.
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