Buy now, pay later (or BNPL) is a kind of installment payment plan. It can give consumers the option of making a big purchase today and spreading out payments over subsequent weeks or months, possibly interest-free. You may find these services offered under such names as Afterpay, Affirm, or Klarna.
Many of the country’s largest retailers — including Saks Fifth Avenue, Target, Walmart, and Amazon — offer buy now, pay later services. This kind of short-term financing can be helpful for shoppers hoping to buy an item over time, but there are pros and cons to purchasing this way.
Here, take a closer look at BNPL, its benefits and drawbacks, and whether it’s a good option for you.
What Is a Buy Now, Pay Later Plan?
Buy now, pay later is a way of purchasing an item in which you pay it off over time. It’s similar to layaway, but you get to take possession of the item right away rather than wait until it’s fully paid off.
For instance, if you are buying a new refrigerator with all the bells and whistles, using BNPL means you can get the fridge delivered ASAP and pay it off over time. With layaway, you’d have to wait until your series of payments were made and then, and only then, would you get the appliance.
A couple of other important points to note:
• BNPL can come with fees and interest, depending upon the particular program you use. In this way, it may be similar to using a credit card and not paying the full balance off at the end of the month.
• Most buy now, pay later services run a soft credit check (which won’t affect your score) or no credit check at all. Since they don’t require strong credit, these plans can be an appealing option for consumers with a poor credit rating or no credit history.
• Buy now, pay later services make money by charging interest and fees on delinquent payments. These lenders also typically charge the merchants fees. Retailers are often okay with this because these financing programs allow customers to spend more at their store, either in person or online.
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The Rise of BNPL Services
You may wonder how popular buy now, pay later services are? Currently, there are approximately 79 million Americans paying for merchandise this way, and research indicates that the percent of adults using this method has risen from 18% in summer of 2022 to 20% in summer 2023. The fact that one in five people in the US are paying by BNPL shows that this has become a popular option.
How Buy Now, Pay Later Works
If you are wondering how BNPL works, here’s an example. Say you want to buy a $300 Vitamix Blender, but you hesitate to fork over the entire purchase price upfront. When you click on one of these buy now, pay later apps or sign up at checkout, you can purchase and receive the item right away. You are usually able to break up the $300 into several (often four) equal, interest-free payments. Typically the first payment is due at checkout, and the remaining three are each due two weeks apart.
Process of BNPL
When opting for BNPL (a form of a short-term loan), you’ll likely be asked for some credentials, such as name, address, phone number, birthdate, and Social Security number. A soft credit check, which does not impact your credit check, is typically conducted to approve or reject your request to use these installment payments. If you get the green light, payments are typically deducted via your credit card, debit card, or bank account.
You will see this kind of BNPL option offered in various ways, whether you’re shopping for handmade jewelry on Etsy or booking a vacation.
BNPL and Fees
Short-term BNPL programs often don’t involve the consumer paying any interest or fees over, say, four payments. However, with longer-term BNPLs, interest may be charged, potentially at a high rate. In addition, if you don’t make payments on time, you can be hit with fees.
Common BNPL Providers
If you’re curious about buy now, pay later providers, here are some of the names you may see:
• Addi
• Affirm
• Afterpay
• Apple
• Klarna
• Laybuy
• Limepay
• Mastercard
• PayPal
• Revolut
• Splitit
• Sunbit
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Advantages of Buy Now, Pay Later
Now that you know what is buy now, pay later purchasing, here’s a closer look at the pros of this kind of payment service.
Enhancing Purchasing Power
Buy now, pay later can allow you to buy something pricey without paying for it upfront. You get to take the item home and have the subsequent payments paid via credit card, debit card, or bank account. Unlike layaway plans, you don’t have to wait until the item is fully paid for before taking possession.
Saving Money
Some BNPL programs may offer consumers the opportunity to save on a major purchase. For instance, if you were to buy a new couch with BNPL and pay it off over four months, drawing funds directly from your bank account, you might fare better financially than if you bought it with your credit card and didn’t pay your balance in full. In this scenario, BNPL could help you avoid paying interest on your credit card.
By reading the fine print of a BNPL offer, you may be able to avoid interest and late fees, depending on which service you use.
Quick Approval
If you apply for BNPL, you typically don’t need to wait more than a few seconds to be approved. This can be considerably quicker than seeking a line of credit via other means.
Recommended: Can You Build Credit With a Debit Card?
Considerations Before Using BNPL
Now that you know about the upsides of BNPL services, dig into the potential drawbacks.
Potential for Overspending
This type of payment plan can be so appealing, it may entice people who are already struggling to pay their bills to splurge. It can be quick to apply and be approved, and consumers may overlook the possibility of being charged interest and fees (or even being put in for collection) if payments are late.
Paying Interest and Fees
If a BNPL plan is paid off as planned, the shopper may not incur any interest or fees. But if funds aren’t paid on time or a longer-term plan is chosen, an interest rate of up to 36% may be assessed. Late fees can run anywhere from one dollar to 25% of the purchase price. As you see, it can wind up being a very expensive proposition if you cannot stick to the original schedule of paying for your item.
BNPL and Your Credit Score
The other factor to consider is that BNPL may mean that you miss the opportunity to build your credit score. For instance, if you make on-time payments with a credit card, it can contribute to building your score. Those payments are reported to the credit bureaus, but many BNPL providers do not update the bureaus about funds they receive on-time.
Possible Loss of Rewards
You can earn credit card rewards and cash back if you use your plastic to pay for a purchase. When you pay via a BNPL service, you miss out on that opportunity.
Comparing BNPL With Other Payment Options
If you’re contemplating using BNPL on a major purchase, take a moment to compare options.
Credit Cards vs BNPL
As noted above, BNPL plans may be able to help you avoid credit card interest fees if you pay the amount due on time and don’t wind up adding it to the balance on your plastic.
However, these plans could encourage you to overspend and possibly add to your credit card debt. In addition, if you pay your BNPL bills on time, you may be missing out on the opportunity to build your credit score. You may also not receive the cash back or other rewards that could be coming your way when you use your credit card.
Personal Loans vs BNPL
If you are making a single big purchase and feel confident you can stick with the terms of paying off a buy now, pay later plan, that may be a fine option.
However, if you are, say, redoing a kitchen and need to replace every major appliance, you may not want to wade into that many BNPL payments. If you can’t wait to save the money from your salary either, you might want to look into a personal loan, which can offer a more affordable interest rate vs. credit cards, and help you pay for what you need.
Worth noting that you will likely have a hard credit check vs. a soft pull if you go the personal loan route.
Is BNPL Right for You?
To decide if a BNPL is right for you, consider the following:
• Is a buy now, pay later offer encouraging you to buy something you really cannot afford right now?
• Do you feel confident you can fulfill the schedule of BNPL payments, avoiding interest and fees?
• Do you really want or need to take the item home now vs. later via layaway?
• Is it a concern that you will probably miss out on the opportunity to build your credit by paying with a credit card?
• Are you comfortable with using BNPL vs. a credit card and thereby not reaping any of the rewards you might get via using plastic?
The Takeaway
Buy now, pay later plans can allow people to make purchases that they might not be able to easily afford otherwise. If you purchase an item this way, you will be spreading your payments out over a number of weeks or even months. This can be an attractive option; most of the time, there will be no interest.
However, your installment payments won’t build your credit history, and if you miss payments, you’ll likely be stuck with fees and may damage your credit score.
Another way to afford a major purchase is to simply save up in advance by putting some money aside each month in your bank account until you have enough to pay in full.
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