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What is buy now, pay later and should you take advantage of it?

There’s always a catch.
Written byMiranda Marquit
Miranda Marquit
Miranda is an award-winning freelancer who has covered various financial markets and topics since 2006. In addition to writing about personal finance, investing, college planning, student loans, insurance, and other money-related topics, Miranda is an avid podcaster and co-hosts the Money Talks News podcast.
Fact-checked byDoug Ashburn
Doug Ashburn
Doug is a Chartered Alternative Investment Analyst who spent more than 20 years as a derivatives market maker and asset manager before “reincarnating” as a financial media professional a decade ago.
Table of Contents
Read More
Documents labeled Bankruptcy Chapter 7 on a desk with a pair of glasses.
Chapter 7 bankruptcy protection: When financial issues hit a breaking point
Good Debt Bad Debt, composite image: home buyers, shoppers
Good debt vs. bad debt: It’s all about targeting your goals
Photo illustration of hands pulling on a rope attached to a small tractor on a table.
Credit 101: Hard vs. soft credit check
Photo of a phone displaying the words "Buy now, pay later."
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Four easy installments?
© panuwat/stock.adobe.com

Making a big purchase online can feel unmanageable, considering you either have to part with your money all at once, or you have to pay with money you don’t (yet) have. One trend that’s made it easier to buy what you want immediately is buy now, pay later (BNPL).

What is buy now, pay later? It’s just what it sounds like—a way to make your purchases now and pay them off in installments over time. Like many forms of debt, BNPL can be great if it’s used wisely and sparingly, but can turn your financial goals upside down if it’s not done right.

Key Points

  • Buy now, pay later (BNPL) is a short-term loan.
  • You won’t pay interest with BNPL, but late fees can be steep—making them potentially more expensive than some loans.
  • With BNPL, it’s easy to get caught in a vicious debt-trap cycle.

What is buy now, pay later?

Buy now, pay later represents a short-term, interest-free loan. You’re most likely to see it offered when you check out online, although some BNPL apps also allow you to pay at the cash register at a brick-and-mortar store.

With BNPL, you purchase the item, then make regular installment payments until it’s paid off.

Buy now, pay later companies

Different buy now, pay later companies offer various terms, often ranging from six weeks up to 18 months. Some BNPL companies might check your credit, while others don’t worry about it. And some providers let you choose a longer repayment period, but charge interest for longer plans.

Some of the common buy now, pay later companies you’re likely to encounter include:

  • Affirm (AFRM). Affirm offers four regular installments for 0% interest, or a monthly payment plan for up to 12 months with interest charges.
  • Afterpay (AFTPY). There’s no interest for this short-term loan, but you must make four equal installments, and late fees can add up if you miss a payment.
  • Klarna. With this privately held company, you can avoid interest if you pay in four installments or within 30 days. There’s also an interest option for longer terms and hefty late fees.
  • PayPal Pay in 4 (PYPL). PayPal lets you divide a payment into four regular payments.

Websites add BNPL options to encourage people to make larger purchases without feeling as though they’re going deep into debt. And BNPL services have increased in popularity; the Consumer Financial Protection Bureau (CFPB) reported their use increased tenfold between 2019 and 2021.

BNPL allows you to pay off purchases in installments over time, but there are risks to watch out for.
Encyclopædia Britannica, Inc.

How does BNPL work?

The buy now, pay later process is fairly straightforward. When you visit a website and want to make a purchase, you’re likely to see different payment options. You can pay for the item outright using your credit card or a payment processor like PayPal. But, increasingly, you may also see a BNPL company offering the option to pay in four installments.

If you choose the BNPL option, you’ll fill out a quick application form. You’re usually prompted to provide bank account or credit card information so you can set up autopay for your installments.

Once your BNPL application is approved, you can complete your purchase. For “pay in 4” BNPL arrangements, you make your initial payment immediately, at the time of purchase. The remaining payments are made every other week. The total term of the loan is usually six weeks.

As long as you make your payments as agreed, you don’t have to worry about interest charges or late fees. Sounds like a good deal, right? You get manageable payments without worrying about interest. Unfortunately, there are some downsides to BNPL.

Disadvantages of buy now, pay later

Don’t assume that BNPL is the unicorn payment arrangement you’d like it to be. Sure, as long as you make your payments on time and you pay off the loan in four installments, you don’t have to worry about interest or fees. It’s also popular among younger consumers because it doesn’t require you to have a credit history.

Before you get too excited, though, it’s important to understand some of the downsides.

  • You might not be building a credit history. According to the CFPB, many buy now, pay later companies don’t send information to the credit reporting agencies. This means your on-time payments aren’t likely to show up on your credit report.
  • It’s easy to build up debt. Remember—these are loans. You can have several BNPL payment plans at once. These companies don’t check how much debt you have elsewhere, so you might get in the habit of using BNPL credit too freely for purchases.
  • You might get stuck in a cycle. Once you’ve built up BNPL debt, it’s possible to end up in a negative cycle. You can’t afford to make a purchase outright because so much of your income is going to installments for BNPL companies. So you need to set up yet another buy now, pay later plan to make the next purchase.
  • Fees can add up. Don’t forget about late fees. If you’re on autopay and you don’t have enough in your bank account to cover an installment, the payment won’t go through and you’ll be charged a late fee. Over time, especially if you have several BNPL loans, those fees can become expensive.
  • Longer-term plans come with high interest rates. If you choose a long-term BNPL arrangement with monthly payments, you could end up paying an interest rate of up to 30%. That’s a hefty price to pay to carry your debt—more punitive than many credit cards.

The bottom line

Buy now, pay later can be a savvy arrangement if you use it once or twice to make large purchases more manageable. And as interest rates have risen in the post-pandemic economy, an interest-free loan—if it allows you to keep more money in interest-bearing accounts for a few weeks—is like a bonus.

However, as with any debt, you run the risk of getting in over your head. If you’re trying to stay within a monthly budget, remember that a BNPL purchase is not free money. Deferring payments may help this month’s budget, but you might find yourself running short in a month or two.

Plus, if you’re trying to raise your credit score, BNPL purchases might not help. And if you aren’t careful, you could rack up hefty fees and interest charges.

References