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Buy now, pay later (BNPL) programs offer a kind of installment payment plan that is essentially a short-term loan. BNLP can give consumers the option of making a big purchase today and spreading out payments over subsequent weeks or months, often interest-free. You’ll find these services offered under such names as Affirm, Afterpay, and Klarna.

Many of the country’s largest retailers — including Target, Walmart, Macy’s, 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.

Read on to learn more about BNPL and how it works, its benefits and drawbacks, and whether it’s a good option for you.

What Is Buy Now, Pay Later (BNPL)?

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 only then would you get the appliance.

A couple of other important points to note:

•   BNPL can sometimes come with fees and interest, especially if it’s a longer- term repayment plan. 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). 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.

As noted earlier, some of the leading buy now, pay later providers include Affirm, Afterpay, Klarna, PayPal, and Zip. Some financial groups, like banks and credit cards, also offer BNLP features.

How Does Buy Now, Pay Later Work?

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. You just don’t have that much spare cash sitting in your bank account. But if you click on a buy now, pay later app or sign up at checkout, you can purchase and receive the item right away.

1. The Checkout Process

When opting for BNPL at checkout, 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, is typically conducted to approve or reject your request to use these installment payments.

2. Making the Down Payment

If you are approved for BNPL, payments are typically deducted via your credit card, debit card, or bank account. You are usually able to break up the cost of the item into several (often four) equal, interest-free payments. In the case of the $300 Vitamix, that would come out to four payments of $75 each. Typically, the first payment is due at checkout.

3. Paying Off Installments

The remaining three payments are each due approximately two to four weeks apart. In most cases, the BNLP provider will deduct them directly from your credit card, debit card, or bank account.

Interest and Fees to Watch Out For

Short-term BNPL programs of several often don’t involve the consumer paying any interest or fees over, say, four payments. However, with longer-term BNPLs that last months or even a year or more, interest may be charged, potentially at a high rate — sometimes as high as 35% or so. In addition, if you don’t make payments on time for short-term, or longer-term BNPL programs, you can be hit with fees.

Does Buy Now, Pay Later Affect Your Credit Score?

Buy now, pay later typically doesn’t affect your credit score. However, there are certain instances where your score might be impacted.

Soft vs. Hard Credit Inquiries

BNLP involves a soft credit check which does not impact your credit. A soft credit check is typically used during preapprovals for credit cards and loans.

With a soft check, the provider would review your credit report and credit score to get an idea of how well you are handling your credit. A hard credit check, on the other hand, happens when you officially apply for a credit card or a loan, typically by filling out an application. A hard check may temporarily impact your credit score, causing it to drop a few points for a few months. But again, BNPL does not involve hard credit checks.

Reporting to Credit Bureaus

Buy now, pay later payments are generally not reported to the credit bureaus. That means by using BNLP, you could miss out on the positive value of on-time payments and lose an opportunity to build your credit score.

However, if you are late with your payments or miss payments, the BNLP provider may report those payments to the credit bureaus and even send your account to collections. This could negatively impact your credit score.

Recommended: Guide to Credit Score Ranges

When to Use Buy Now, Pay Later (and When to Wait)

So why would someone use buy now, pay later? In some situations, and for some items, it may make sense. But in other scenarios, it may not be the wisest option. Here’s how to tell the difference.

Best Scenarios for BNPL

Some of the situations when BNLP could make sense include:

•   When you urgently need an item. Say your oven breaks suddenly and can’t be repaired. BNLP could help you get a new one and take it home right away without you having to shell out for the entire cost at once.

•   If the BNLP offer is interest-free. In this case, it could help you afford an expensive purchase by splitting it into separate payments without interest.

•   When you need to manage your cash flow in the short term. By paying for just one-quarter of an item’s cost at the time of purchase, you can hang onto your remaining money for now, so as not to be left short, and budget ahead for the remaining BNLP payments (a 50/30/20 budget calculator might help with this).

When to Avoid BNPL

But BNLP is not always the best choice. These are some of the times to steer clear of it:

•   When it encourages you to make impulse buys. BNLP could make you want to purchase something you really don’t need and can’t afford.

•   If you’re not sure you can make the payments. Delayed and missed payments will cost you in fees and possibly interest. Plus, they will likely be reported to the credit bureaus and negatively impact your credit. And if the payments are being taken from your bank account and you don’t have enough funds in the account, your account could end up overdrawn (if you use your bank account for BNPL, you may want to check to see if you have overdraft protection).

•   If the BNLP offer comes with a high interest rate. Longer-term BNLP offers may have interest rates that are sometimes as high as 35% or so, which means you’ll end up paying significantly more the item overall.

Pros of Using BNPL

If you’re considering using BNLP, there are some advantages of these programs to be aware of. The following are some possible benefits to factor into your decision.

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 of it.

Saving Money on Interest

Some BNPL programs may offer consumers the opportunity to save in interest payments 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.

You could use that money to build an emergency fund or add it to your fund if you already have one.

Recommended: Emergency Fund Calculator

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.

Potential to Build Credit Score

Some, but not all, lenders are reporting activity on BNPL programs to the credit bureaus. If this is the case and you pay on time, a BNPL purchase could positively impact your score.

Cons and Risks of BNPL

Now that you know about the upsides of BNPL services, it’s important to 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 a double-digit percentage 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.

Missing Out on Credit Card 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.

BNPL vs. Credit Cards vs. Personal Loans

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 but this isn’t reported to the credit bureaus, 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 alternative to personal loans.

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.

It’s worth noting that you will likely have a hard credit check vs. a soft pull if you go the personal loan route.

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. Most of the time, there will be no interest. However, if you miss payments, you’ll likely be hit with fees and your credit score may be negatively impacted.

Another way to afford a major purchase is to simply set money aside each month in your bank account until you have enough to pay in full.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is the difference between layaway and buy now, pay later?

The main difference between buy now, pay later and layaway is that with BNPL, you can take the item home right away and use it even as you continue to make your installment payments. With layaway, you need to pay for the item in full before you can take it home.

Can I use BNPL for everyday purchases like groceries?

Yes, you can typically use BNPL for everyday purchases like groceries. However, if you miss payments, you can incur fees, and possibly interest, and it could impact your credit. Also, because groceries are an essential, recurring item, continuing to use BNPL to pay for them means that you could end up with a number of different repayment plans to juggle and pay off, which may be difficult.

What happens if I miss a BNPL payment?

If you miss a payment, late fees and possibly interest are incurred. If you are late with payments or miss them entirely and those actions are reported to the credit bureaus, it could negatively impact your credit score.

Do BNPL apps charge interest?

BNLP apps typically don’t charge interest on short-term BNLP plans. But they may offer longer-terms BNPL plans that usually do charge interest, and the interest can be as high as 36%.

How do I return an item bought with BNPL?

Returning an item bought with BNLP can be complicated. Because the BNLP provider has paid for the item in full on your behalf, when you return it, the refund is issued to the BNLP provider. It’s then up to them to apply the refund to your account. To help make the return process easier, find out the provider’s return policy beforehand so you know what to expect, and keep copies of all transactions.

Photo credit: iStock/Mikolette

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