Similar to short-term financing, Buy Now Pay Later (BNPL) has become a very popular payment method, with more than 79 million U.S. consumers using BNPL.
This type of financing is often offered by retailers as a way to entice customers to make purchases they may not be able to afford outright.
You can also use the Buy Now Pay Later method in-store with thousands of merchants that have already adopted this platform.
Some of the most popular Buy Now pay Later companies in the US include Klarna, Affirm, Afterpay, Zip, and PayPal’s Pay in 4.
We look at what exactly BNPL is, how it works, how it may affect your credit, and what the benefits and drawbacks of this credit product are.
What Is Buy Now Pay Later?
BNPL allows you to split the cost of a purchase over a specific time period, so you don’t have to pay the full amount at once.
Buy Now Pay Later payments are typically made over four or six weeks.
Shoppers worldwide are using Buy Now Pay Later increasingly more for purchases online, as it enables them to make a purchase right away and pay it off later without having to get a personal loan to pay for it.
If you stick to the payment agreement, you don’t pay interest or fees, which is one of the best benefits of BNPL.
However, late payments will attract additional fees.
For the majority of shoppers, using Buy Now Pay Later can help them spread out the cost of their purchases interest-free.
But this should be used with caution to avoid ending up in debt you can’t afford.
How BNPL Works
There are a few different ways that buy now pay later works.
The most common is deferred billing, which means that you don’t have to pay for your purchase right away. Instead, you can pay for it over time, typically in monthly installments.
Another way that buy now pay later works is through subscription-based billing.
With this method, you’ll be automatically charged for your purchase each month until it’s paid off in full.
This can be a good option if you want to spread out the cost of an expensive item over time without having to worry about making payments yourself.
Finally, some companies offer financing options for buy now pay later purchases. This means that you can take out a loan to cover the cost of your purchase and then make payments on the loan over time.
This can be a good option if you need more time to pay off your purchase but don’t want to put it on a credit card or take out a personal loan.
Buy Now Pay Later Pros and Cons
Pros
- Easy way to pay for something you want
- No interest on purchases
- Don’t need a high credit score to qualify
- Fast approval process
One of the main attractions of BNPL is that there is typically no interest on purchases, making it a better option than credit cards or personal loans.
Borrowers typically also don’t need high credit scores to qualify for a BNPL purchase, making it more accessible to more shoppers.
Payments don’t increase your credit score
No rewards on purchases
Can attract late fees
Cons
Even if you make payments on time, Buy Now Pay Later agreements don’t improve your credit score so it won’t help to boost your overall credit profile.
If you don’t keep to your payment arrangements, you will pay late fees which can be somewhat high, depending on the provider.
Should I use BNPL?
Buy Now Pay Later could be a good option for shopping without spending the full amount. It’s a type of credit agreement, whereby you make the required installments over weeks or months until you pay the balance in full.
However, when using BNPL, you should consider a few things:
Your Obligations
BNPL is increasingly marketed as the easiest form of checkout.
That’s why you might even sign up for it without realizing it because the transactions are often so frictionless. To entice you to pay with BNPL, some retailers occasionally provide additional discounts.
This has the implication that you might not think it through properly and you may be persuaded to make a larger purchase than you planned for.
Review the Terms
It’s likely that the tiny print outlining what you’re signing up for is published somewhere on the provider’s website that is not typically easy to find.
It may be difficult to tell which repayment plan you’ve opted for and whether it is the best one for your circumstances, particularly if you are given a choice of BNPL products at the checkout.
Make sure to look for and then double-check the terms and conditions before you simply check a box without reading them.
If you don’t, you won’t be able to predict what will happen if you miss paying a bill or find yourself unable to make the required monthly installments.
Best Buy Now Pay Later Apps 2024
Klarna
Klarna is best if you’re looking for a range of payment plans. Their APR ranges from 0-19.99% and the loan term can go up to 18 months.
The amount of credit you qualify for depends on your credit profile and if you miss a payment with Klarna you’ll pay a late fee of up to $7 per missed payment.
Klarna’s payment plans include Pay In 4 (pay over six weeks), Pay in 30 Days (you get to take the item and if you like it pay within 30 days), and monthly financing (monthly payment plans with interest).
Affirm
Affirm offers payment plans from six weeks up to 12 months with no late fees. But you may need to pay interest on loans depending on your payment type.
Affirm offers two types of payments: one short-term option and one with a longer term but with interest.
- Pay in 4: No late fees or interest charges. Pay every two weeks to complete your payment in six weeks.
- Monthly payments: This is ideal for larger purchases. Pay your loan in monthly installments with interest ranging from 0-36%.
Afterpay
With Afterpay, there is no interest charged but if you pay late you’ll be charged a late fee of up to $8. The late fee is capped at 25% of the purchase price.
Afterpay also uses the same Pay In 4 method where your total is split into four payments, two weeks apart.
Afterpay is simple and straightforward, with the only downside being that Afterpay has to approve your purchases.
PayPal Pay in 4
With PayPal Pay in 4, you can get loan amounts between $30 and $1,500 with a loan term of up to six weeks.
There are no late fees and no interest payable. Payments don’t have any impact on your credit score either.
PayPal Pay in 4 is available throughout the US except for these states: Missouri, Nevada, New Mexico, North Dakota, and Wisconsin.
How to save $435.00 on your loan
The price difference for a $500.00 loan in 90 days is $435.00.
How to choose the best BNPL App
Just like personal loans or credit cards, choosing a Buy Now Pay Later app is not simply a one-size-fits-all approach. Here’s how to compare:
| Feature | Why |
|---|---|
| Interest | Although most BNPL payment programs don’t charge interest, it can’t hurt to check whether you’ll pay any interest. |
| Terms | Most BNPL providers offer payments over six weeks, but some longer. Compare the options and whether interest is charged. |
| Amounts | Most spending limits will depend on your creditworthiness and the purchase amount. For higher ticket items, make sure the limit will be sufficient. |
| Fees | Check if the provider charges late fees. Not all providers charge fees to borrowers. |
| Credit check | Most BNPL companies only do a soft credit check on borrowers but this may influence your spending limit. |
| Availability | Make sure the BNPL site you want to use is accepted by the specific retailer you want to purchase from. |
How Merchants Benefit
With the BNPL model, the payment provider makes money off of the retailer rather than the customer.
The majority of Buy Now Pay Later service providers deduct a percentage from any sales made where customers choose BNPL as a payment method.
Providers like Affirm and Afterpay help retailers boost their sales by increasing the average shopping cart value.
Does Buy Now Pay Later Affect Your Credit Score?
Most businesses perform a soft credit check as part of their affordability checks when you apply for Buy Now Pay Later credit.
Your credit score won’t be impacted by these soft credit checks.
Providers of BNPLs can, however, inform credit reference agencies of missing payments. Therefore, missing or paying late on your monthly installments could lower your credit score.
Some companies may send unpaid invoices to a debt collection agency if payments are frequently late, affecting the borrower’s credit rating.
Missed payments
If you miss a payment deadline, you may be charged a late fee, or the payment may be carried over to the next due date.
If you are still unable to make payments, some providers may hand you over to a debt collector to recover outstanding payments.
Therefore, it’s imperative that you contact your provider to explain your circumstances and see if they can offer you an alternative solution.
Will I Be Eligible for BNPL?
Because you are borrowing the item’s purchase price using Buy Now Pay Later, it is viewed as a form of credit in some ways.
This means that Buy Now Pay Later providers may do a credit check before deciding whether to approve your application.
If you have a bad credit score, you probably won’t be eligible for BNPL credit.
You should check your own credit score regularly to make sure that there aren’t any issues that may prevent you from qualifying for credit.
Related: How To Improve Your Credit Score
Buy Now Pay Later Alternatives
Buy Now Pay Later is a convenient way to make a purchase and spread out the cost over time, interest-free.
However, there are alternatives available.
You may, for instance, apply for a credit card that allows you to spread out the cost of a purchase over a number of months. If you pay the balance in full within a specific time period, you can avoid paying any interest.
Credit cards also have the benefit of being used for purchases at multiple merchants and not only once.
Which app is the best buy now, pay later?
What brands do buy now, pay later?
Does Walmart have a buy now, pay later?
What is the APR on BNPL purchases?
Sources
- Insider Intelligenceaccessed on May 24, 2023
- CFPBaccessed on May 24, 2023
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