What Is Buy Now Pay Later (BNPL)?

Buy now and pay later is taking the market by storm, but will you be taken to the cleaners if you indulge in this online purchasing craze?

That’s all up to you.

BNPL is like using a credit card or getting a loan. But unlike credit cards, there is light at the end of the payment tunnel.

Purchases are paid in installments over the course of a few weeks or months. And unlike credit cards, it’s interest free.

So, what’s the catch?

There really isn’t one, as long as you make your payments on time. The problem is millions of Americans have a hard time doing that.

If you’re one of them, BNPL is just another service that encourages you to buy things you can’t afford and probably don’t even need. That sort of decision making always comes with a price.

How Buy Now Pay Later Works

It’s weird, but imagine your credit card and debit card got together and gave birth to a hybrid card.

BNPL companies team with merchants to offer an installment option when you check out. It’s usually 2-to-4 payments that are automatically withdrawn from your debit card account, though you can use a credit card under some plans.

When you check out, you give the BNPL company your name, address, phone number and birth date. Instead of a traditional credit check, you are approved or rejected based on an algorithm.

Companies don’t divulge what criteria goes into their algorithms, but like credit cards, they want your business, so the algorithm probably will give you the benefit of any payoff doubt.

You essentially get a mini loan. It’s quick, simple, tempting and makes immediate financial sense. Unlike credit cards, the retailer picks up the processing fees instead of the consumer.

What’s in it for Walmart, Macy’s, Sephora, and thousands of other retailers? BNPL customers usually buy more stuff.

The process has actually been around for about 15 years, but it’s really caught fire since the Covid shutdown. Online sales skyrocketed but consumers have shied away from using credit cards. The average credit card debt was $5,075 in the third quarter of 2020, down 10% from that period in 2019.

People are worried about debt, and they see BNPLs as an ideal way to buy something without paying 18% interest rates. That’s why companies like Klarna, Affirm and AfterPay now dream of becoming Visa, Mastercard and Discover.

Klarna doubled its business in 2020 and has a consumer base of 11 million. Afterpay had $2 billion in global sales last November. Affirm’s business was also up about 100% in 2020.

It’s a win for BNPLs. It’s a win for retailers. But is it really a win for consumers?

Is Buy Now, Pay Later a Good Idea?

BNPLs are no worse than any other product that helps people spend money they don’t have. They are certainly better than payday loans or credit cards with interest rates over 25%.

But like all those services, they try to remove the anxiety that forces people to tap the brakes and ask, ‘Can I really afford this?” Instead, they just speed on through to buy something that looks marvelous in the moment – and cheaper!

Four payments of $90 for a Series 6 Apple Watch doesn’t feel like you’re spending the $360 it actually cost. You feel more like a thrifty Clark Howard than a sucker. It’s a marketing sweet spot that has made QVC a sales Goliath.

Almost two-thirds of BNPL users say they buy jewelry and other “want” items they’d otherwise avoid, according to a survey by the consumer data tracking firm Cardify. Nearly half of BNPL users say they spend between 10% and 40% more than they would if they were using a credit card.

But like credit cards, the bills eventually come due. Unlike credit cards, you can’t kick that can down the road very far.

Some BNPLs automatically charge your debit card or credit card when your payment is due. They can also charge late fees and report the late payments to credit bureaus.

According to an Ascent study, only 22% of consumers understand all of the terms and conditions of a BNPL plan. You have to read the fine print.

But more than anything, you have to avoid impulsively buying something you really cannot afford.

Risks of Using BNPL

If you are not familiar with using Buy Now Pay Later plans – specifically the repayment plans and return policies, which vary greatly depending on the vendor – it would be wise to wade into this option slowly. There are risks involved that may result in late fees, returned merchandise fees and a negative impact on your credit score.

For example, some businesses will ask that the balance be paid in a month, other will give you three months and some may even give you six months. If you work off a budget, it helps to know how much is needed and how quickly it is needed.

While there is typically no interest charged on BNPL accounts, failure to repay on time could result in late fees being added to the balance and your credit score dropping if the missed payment is reported to the credit bureaus.

Another risk involved is the same one associated with credit cards: Are you disciplined about the use of BNPL? Since the money is not coming out of your pocket (yet!), you may overspend or forget about previous purchases and accumulate bills you can’t afford.

Pros of Buy Now Pay Later

Buy Now Pay Later plans are a hit with both retailers and consumers for many reasons, including:

  • Most stores offer this option. If you are out shopping and see something you like, you can take it home, and pay for it over time.
  • Payment plans. Businesses may give you anywhere from 1-6 months to pay for the item and, unlike credit cards, there typically is no interest charged during repayment time.
  • Easy approval. Most vendors don’t do credit checks, so your credit score, or lack of credit history, is not a factor in qualifying.

Cons of Buy Now Pay Later

Taking on any kind of debt, especially one you might not be experienced at using, can become costly. Some of the cons involved in BNPL include:

  • Because qualifying is so easy, there is a temptation to overspend, especially among young consumers.
  • If the company does report the spending to the credit bureaus and you are late with a payment, it will have a negative impact on your credit score.
  • If the company doesn’t report your spending to the credit bureaus, BNPL will not help you establish a credit history or improve your credit score, the way a credit card would.
  • Late fees for missed payments run $7-$8, according to the Consumer Financial Protection Bureau.
  • Returning the item can be difficult.

Buy Now Pay Later Apps

Here’s a list of the most popular BNPL apps and their plans.

  • Klarna – Installments are paid every two weeks. It also offers a flexible payment schedule that can give you up to three years to pay off the debt.
  • Afterpay – Installments every two weeks.
  • Sezzle – Pay the first installment at the time of purchase, then pay the balance in three installments over the next six weeks.
  • Quad Pay – Pay the first installment at the time of purchase and the rest is charged every two weeks.
  • PayPal Credit – For purchases under $99, you can pay it off over time in monthly installments. For purchases over $99, interest will be charged if they aren’t paid off in six months. And the interest rate is 23.99%.
  • Affirm – It offers payment plans ranging from three months to three years. There are no late fees, but interest charges are up to a whopping 30%.
  • Splitit – Installments are taken from your credit card or debit card, though the maximum purchase through a debit card is $400.
  • Zip Pay – You can choose monthly or bi-monthly payments, with a minimum required payment of $40. There’s a $6 monthly fee for the duration of the payoff.
  • Zebit – It gives you up to a $2,500 credit line. You make a down payment at the time of purchase and the balance is paid over the next six months.
  • Perpay – You fill out a questionnaire and are given a spending limit up to $2,500. Pay periods are based on factors like total debt and account history.

Alternatives to Buy Now Pay Later

Buy Now, Pay Later plans are very attractive for some consumers, but may not be the safest and most productive way to shop. Alternatives to BNPL include:

  • Using a 0% interest credit card. If you qualify, it not only helps build your credit rating, it also could offer a rewards plan.
  • A personal loan. Depending on how much you need, you could tap a family member or friend to pay for the item. If it’s more expensive, a small personal loan from a bank or credit union might be better.
  • Ask the manager if there is a layaway plan available. The only difference is that you won’t get the item until after you paid for it.
  • Budget your money more closely until you have saved enough to purchase the item.

Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Tom’s blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.

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    1. N.A. (2022, September 15) CFPB Study Details the Rapid Growth of “Buy Now, Pay Later” Lending. Retrieved from https://www.consumerfinance.gov/about-us/newsroom/cfpb-study-details-the-rapid-growth-of-buy-now-pay-later-lending/
    2. Cheng, A. (2020,  December 16) Why Retailers Are Embracing ‘Buy Now, Pay Later’ Services This Holiday Season. Retrieved from https://www.forbes.com/sites/andriacheng/2020/12/16/why-retailers-are-embracing-buy-now-pay-later-service-this-holiday-season/?sh=465c5b1639c8
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    4. N.A. (2020, December 20) ‘Buy now, pay later’ services: Here’s how they work. Retrieved from https://www.winknews.com/2020/12/10/buy-now-pay-later-services-heres-how-they-work/
    5. Backman, M (2020, July 20) Study: Buy Now, Pay Later Services Growing Quickly Among U.S. Consumers. Retrieved from https://www.fool.com/the-ascent/research/buy-now-pay-later-statistics/