If you’ve made a large purchase in the last few years, whether online or in-person, you might have been offered to pay for it in installments at checkout. This financing option is known as Buy Now Pay Later, or BNPL for short. BNPL loans have become very popular in recent years due to the flexibility they provide for shoppers, but they come with a few caveats.
In this article, you’ll learn everything you need to know about Buy Now Pay Later loans, including how they work, their pros and cons, and some examples from different providers.
What is Buy Now Pay Later (BNPL)?
With Buy Now Pay Later (BNPL), people can buy products and pay for them at a future date, usually without incurring interest, hence the term. BNPL arrangements, also known as “point of sale installment loans,” are becoming a popular alternative payment option, especially when shopping online.
Many companies offer a loan type known as buy now pay later for purchases made from participating merchants, including Klarna, Afterpay, and Affirm. Even PayPal offers point-of-sale installment loans.
Similar financing arrangements have also been set up by some credit card companies, such as American Express and Chase. BNPL splits the purchase into multiple payments, usually of equal value, the first of which is due at checkout. Each subsequent payment will be billed to your credit or debit card, usually 2 weeks apart.
Interest and late fees can be associated with these plans, although some plans may not charge any fees.
If you shop online, you can often find BNPL payment plans, and many plans are available in-store as well. BNPL is also available for travel and health care.
Although this type of payment plan has been available for years, its popularity increased during the pandemic thanks to a shift to online shopping. Today, you can use a buy now pay later plan at most major retailers, but whether you should use it depends on the plan and your financial situation.
How Does Buy Now/Pay Later Work?
Pay now and pay later programs aren’t all the same. There are many companies offering point of sale installment loans, but generally, they operate as follows:
At checkout, you can choose to break up your total purchase and pay a smaller amount now instead of paying the full balance.
You will be asked to fill out a short application on the checkout screen if you’re interested. You may need to provide your name, address, date of birth, phone number, and Social Security number. A payment method will also be required. The BNPL provider will then run a soft credit check, which won’t affect your credit score, and approve or deny your application in seconds.
There are different approval criteria, so even if you have bad credit or no credit, you may still qualify.
Plans vary by provider, but many providers offer a “pay-in-four” plan, where your purchase is split into four equal installments, with the first payment due immediately and the rest due every two weeks.
If you spend $500 on your purchase, you will pay $125 at checkout, and the remaining $375 will be due in three installments, two weeks apart. You will be able to pay off your purchase in six weeks if you make all your payments on time.
A pay-in-four plan usually does not charge interest, but BNPL plans can charge an annual percentage rate of up to 30%. Late fees range from $5 to $10 and can sometimes be capped at 25% of the order value.
While BNPL and credit cards use the same idea of delayed payments, a few factors set them apart. When you pay for things with a credit card, you only have to pay the minimum amount due each month. The remaining balance accrues interest (unless you used a card with a 0% introductory APR) until it is paid in full. The balance can be carried over indefinitely, however.
BNPL arrangements, on the other hand, usually do not charge fees or have interest rates. However, they follow fixed repayment schedules that range from several weeks to a few months. Each time, you’re told upfront how much you’ll have to pay, and it’s usually the same. The loan is similar to any other unsecured personal or consumer loan.
Some purchases may not be eligible for buy now pay later financing. You may also be limited to the amount you can finance this way. When shopping online, however, buy now pay later can be a convenient way to pay for smaller purchases, and its popularity grew during 2020 along with the growth of e-commerce in general.
Are Credit Checks Required?
Most buy now pay later companies require a soft credit check for approval, which does not affect your credit score. It is possible, however, that others will conduct a hard credit pull, which could temporarily affect your score.
A few buy now pay later loans are reported to one or more of the three major credit bureaus. A financial institution can send this information, which can appear on your credit reports and affect your credit score.
Type of BNPL Loans
BNPL loans generally fall into two categories:
- Loans with interest: Consumers can make real-time purchases with these loans, but with the same type of interest they would incur using a credit card.
- Interest-free loans: Instead of the consumer paying interest on these types of loans, the merchant pays a fee to the third-party lending company.
It is typical for both types of loans to stipulate a specific time within which the loan must be repaid in full. For example, if the item you’re considering costs $1,000, and you can buy it with a no-interest pay-in-four plan, you would traditionally split the purchase into four equal payments of $250.
You may be subject to penalties and other charges if you do not make the payment in full each month. Additionally, BNPL with 0% interest rates might charge you deferred interest for late payments, which will be retroactively applied to the entire balance.
Advantages and Disadvantages of Buy Now Pay Later
Like any type of service, there are advantages and disadvantages to BNPL loans. These are the pros and cons you can expect:
- Payments can be split up: Since you won’t need to pay a lump-sum, you might be able to afford an expensive item.
- There is usually no hard credit check: Applying for a BNPL is easier than applying for a new credit card. Those who are new to credit or do not have a strong credit history might find it more appealing to purchase this way.
- There are zero-interest plans available: BNPL options typically charge zero interest, which is a huge plus.
- The process is simple: You can quickly buy what you need with easy-to-understand terms.
- Helps manage cash flow: BNPLs allow people to buy what they need on a payment plan that fits their budget.
- Term variations may apply: Knowing the terms of a BNPL loan is crucial before committing. If you skip or miss a payment, the penalties could be extremely high. For example, 0% interest might not last for the whole term of the loan, leaving you with costly finance charges in the future.
- There are some services that come with fixed fees: When using these types of programs, you pay a fixed fee each month, which can cost you more over the life of the loan than just purchasing the item outright.
- They don’t help you build credit: Paying on time won’t improve your credit. However, late payments may damage your credit.
- It may lead to overspending: A purchase that can be paid off over time often appears more affordable, but it can quickly add up.
Should You Use BNPL?
Before entering into a BNPL arrangement, there are some things to keep in mind:
- Understanding the repayment terms you are agreeing to is crucial: The repayment terms can vary from company to company. Most companies will ask that you pay the remaining balance within 3 installments with payments every 2 weeks. You may be given three months, six months, or even longer to pay off purchases from others. Additionally, your interest rate, if there is one, may vary depending on the terms of the loan. It is also necessary to know how your payments will work so that you can plan accordingly. As a result, you will be able to afford your payments and make them on time. You could be charged late fees if you miss a payment for a buy-now, pay-later agreement. Furthermore, the credit bureaus may report your late payment history, which could lower your credit score.
- Alternatives like credit cards may be a better financing choice for some shoppers: As well as earning rewards or cash back, most credit cards report on-time payments to credit bureaus, something that not all BNPL providers do. Keeping up with your payments can help you build your credit score and open up more affordable financing options in the future. In addition to being carefully regulated, credit cards feature additional consumer protections, such as more cost transparency and more stringent underwriting guidelines that help keep people from overextending themselves. BNPL industry oversight may expand in the future with the Consumer Financial Protection Bureau’s announcement of a formal inquiry in December 2021; the agency hasn’t yet announced its findings.
- You should look for a BNPL plan with zero or minimal interest: The monthly payments will be lower, and the loan will be easier to repay if you do this.
- Avoid buy now pay later if you need to pay your bills or start an emergency fund: BNPL’s convenience makes it easy to overspend. This may result in high late fees or being sent to collections, which will adversely affect your credit score. Keep in mind, however, that approval for 0% interest point of sale installment loans is not guaranteed. Platforms that allow you to buy now pay later charge interest that can easily match or exceed what you would pay with a credit card. In addition, unlike a credit card, buy now/pay later arrangements do not provide rewards.
- You should only use BNPL for necessary expenses: The plan may seem simple and low-cost, but you are still taking on debt, and it is rarely a good idea to go into debt for a non-essential purchase. However, avoid using it to pay your bills, as that could create a vicious cycle.
Last but not least, be aware of return policies and how buy now/pay later may affect your ability to return something you’ve purchased. The merchant may allow you to return the item, but until you’ve provided proof that the return has been accepted and processed, you won’t be able to cancel your buy now/pay later arrangement.
Companies that Offer BNPL
Affirm: Affirm has partnerships with retailers like Amazon, Walmart, and Pottery Barn. Its interest rates vary from retailer to retailer, meaning your rate will vary according to where you shop. Some of Affirm’s partner stores charge no interest, while others may charge up to 30% APR. There are no late fees with Affirm.
Afterpay: One of the largest BNPL companies is Afterpay, and it uses the straightforward pay-in-four strategy. Retailers like Bed Bath & Beyond, Old Navy, and Gap partner with the company. Afterpay does not charge additional fees provided that you pay on time. Should your payment not be received within ten days after the due date, an $8 fee will be charged.
Klarna: Klarna is available at a variety of retailers, including Sephora, Foot Locker, and Macy’s. Klarna’s pay-in-four plan also does not charge interest, but if you miss a payment by ten days, a $7 late fee is applied.
PayPal: PayPal provides a pay-in-four payment plan online and through its mobile app at stores such as Best Buy, Target, and Bed Bath & Beyond. There are no interest or late fees associated with the plan.
Sezzle: With Sezzle, you pay in four installments with zero interest. The pay-in-four option is available at thousands of retail outlets, including Target. The company does not charge a late fee, but it will deactivate your account if you miss a payment, and you will have to pay a $10 reactivation fee to get your account active again.
Zip (previously Quadpay): Using Zip is easy anywhere Visa is accepted when you download their mobile app. Pay-in-four plan customers are charged a $1 convenience fee per transaction, and missed payments are assessed a $5, $7, or $10 late fee, depending on your location.
Credit Card Plans Similar to BNPL
American Express Pay It Plan It: The Pay It Plan It feature of Amex lets customers divide purchases of at least $100 into monthly installments when you charge them to an eligible card and purchase. Up to ten purchases can be combined per account. There will be a fixed monthly fee for each installment that you can review upfront before choosing if this option is right for you.
Citi Flex Pay: With Citi Flex Pay, you can pay off eligible Citi credit card purchases over a set period of time with fixed payments and a fixed APR. Citi’s Flex Plan program also includes a Citi Flex Loan option, which lets you borrow against the card’s credit line. Flex Pay options vary based on the purchase, your credit history with Citi, and the amount of the purchase. Since Citi Flex Pay offers such a wide range of availability, prices, and terms, it makes it more opaque than some other credit cards.
My Chase Plan: For Chase cardholders, My Chase Plan lets them break up the cost of a purchase of $100 or more into equal monthly payments with no interest. Each monthly payment includes a fixed fee. Payment plans range from three to 18 months, depending on the purchase amount, your creditworthiness, and your account history.
Buy Now/Pay Later loans are an excellent choice for people that need to buy a high-ticket item, such as a computer, but lack the immediate funds to do so. Since many providers offer loans with zero-interest rates, you split the purchase over several weeks without having to pay more than what the purchase would normally cost. However, if you can’t make your payments in time, you might accrue late payment fees, and in some cases, it could harm your credit score.
You should avoid BNPL loans if you are prone to overspending, making late payments, or are looking for a way to build your credit, but they are otherwise an excellent way to buy products without having to fork over all the money at once.