Sometimes making a big payment at once isn’t feasible for everyone. But thanks to the rise of Buy Now, Pay Later plans, you can order what you want and pay it off over time.
Also known as BNPL, these plans have rocketed into a $100 billion industry, partnering with major retailers and allowing you to make purchases you may not otherwise be able to afford, from designer jeans to cosmetics. Even your lunch order can sometimes be paid off in four installments.
What is Buy Now, Pay Later?
BNPL plans grew in popularity during the COVID-19 pandemic lockdowns, when people spent more time buying online.
It consists of a short-term installment loan for about six weeks, or sometimes listed as “pay in four” or four separate transactions/payments.
BNPL plans are comparable to old school “layaway” plans, only you get to use the item immediately instead of waiting for it to be paid off. But it might not always be the ideal option. Here’s a look at how it works, and some of the benefits and drawbacks.
While some BNPL retailers don’t charge interest, others do. And the plans have drawn a lot of criticism from consumer groups, who say the plans are causing people to spend more than they can afford. It’s as easy as hitting a button on your online checkout screen.
Interestingly, an estimated 60% of Americans have used a BNPL service at least once, according to a survey by C+R Research.
Today, many Americans can use Zip’s BNPL service to pay for lunch through UberEATS or order a quesadilla at Chipotle, making it super easy to afford a meal when hunger pangs strike, but perhaps more difficult on your finances when you’re still paying off your meal six weeks later.
Using BNPL financing can be convenient for consumers, but there are some potential downsides to consider.
How Does Buy Now Pay Later work?
BNPL is easy and mimics the layaway plans your mom might have used, however with BNPL you don’t have to wait to get the item. This is because BNPL services allow you to take possession of the item quickly, before you’ve completed the payments.
For example, if you purchase an item for $500, you will pay $125 at checkout, then make three remaining payments of $125, each due two weeks apart.
If you make all payments on time, you will have paid off your purchase over six weeks but in most cases you would already have been using the item for six weeks. A layaway plan would have required the item to be paid in full before the store would allow you to take it home.
While many BNPL plans don’t charge interest, some lenders charge an annual percentage rate up to 30%. Late fees range from $7 to $8 and are usually capped at 25% of the purchase price.
BNPLs aren’t all the same, as each company has its terms and conditions, but generally follow these rules:
- When purchasing from a participating retailer, you’ll be asked to choose the Buy Now Pay Later option at checkout
- If approved, you’ll make a down payment, usually 25% of the overall purchase amount
- You then pay off the remaining amount due in three more interest-free installments
You can pay via a check or bank transfer; payments can also be automatically deducted from your debit card, bank account, or credit card.
BNPL plans have a fixed repayment schedule — usually over weeks or months. You’re told upfront how much you’ll need to pay each time; usually it’s a fixed amount.
But not all purchases may be eligible for BNPL financing (though a lot of them seem to be right now), and there may be limits on the amount you can finance.
Most BNPLs only require a soft credit check for approval, which won’t affect your credit score. However, others may perform a hard pull of your credit, which will lower your score temporarily.
Some BNPLs are reported to one or more of the three major credit bureaus. If a financial institution sends the information, the loan can appear on credit reports and impact a credit score.
And while these plans offer convenience, they also bring risk.
A DebtHammer survey showed they’re fueling America’s consumer debt struggles: 32% of Buy Now Pay Later plan users have had to skip paying an essential bill such as rent, utilities or child support in order to make their payments. Even after that, 30% report that they’ve struggled to make their payments. And a separate DebtHammer survey showed that and 66% of Americans expected to use a “buy now, pay later” plan last year to hell buy holiday gifts.
And late payments can lead to fees or even a call from the debt collector, depending on the terms of your provider. The penalties usually come as a surprise to consumers, who often lose track of what they’ve purchased, when the payments are due, and multiple payments can affect your weekly budget. In addition, providers terms often differ. Some charge late fees and report to credit bureaus, while others don’t.
The rapid growth of these plans has even drawn the attention of the Consumer Financial Protection Bureau, which has launched an inquiry.
But by now, many of these companies have become household names: more than 45 million Americans ages 14 and older will use Buy Now Pay Later plans in 2022, services. Here’s a look at some of the most familiar names.
Top BNPL companies
Here are some of the most common Buy Now, Pay Later companies:
A household name PayPal is one of the main players in online payment processing and now have BNPL services through millions of online merchants, such as Best Buy, Coach, and more, for transactions ranging from $30 to $600.
To use the Pay in 4 services, you need an account with PayPal and be in good standing to qualify for interest-free payments.
PayPal is not a exclusively a BNPL company, but it is a well-known name with a good reputation, and relationships across millions of merchants, offering additional flexibility to consumers.
Other advantages include all payments contained within the app and you can pay the bill directly from a PayPal account. The main disadvantage is that you will lose key consumer protections. For example, if the product is faulty or isn’t what’s promised, you cannot stop making the payments. Because you’ve signed a contract committing to the payments, you have to keep making them while your case is under review.
Previously known as Quadpay, the Zip digital wallet has two types of interest-free accounts, Zip Pay and Zip Money. These accounts may be used with retail partners online and in-store anywhere Zip is accepted.
The company is the owner and developer of the freeware app Pocketbook, one of Australia’s largest non-bank financial apps.
Klarna is a BNPL company based in Sweden and is one of the most recognizable BNPL names in the U.S. Klarna is considering going public later this year, with an estimated valuation of almost $50 billion.
Klarna does not pull your credit when you opt for the Pay in 4 options and doesn’t charge any fees or interest if you make payments on time. The company also offers shorter loans, less than a month, and longer-term loans at 36 months, but with interest.
In addition to the retail partnerships, Klarna has created the Klarna Card, a Visa-branded card that allows customers to pay for in-store purchases over four installments. Instead of a credit limit, cardholders are assigned a “Purchase Power,” which is reassessed after each payment plan is completed. The card currently has an initial waitlist.
Afterpay is another another widely recognized BNPL name. It’s an Australian company that operates globally and was launched in 2015.
Afterpay works through its app, which lets consumers purchase products from around 85,000 merchants. Afterpay offers credit limits starting at $500 that rise based on use and credit scores. It charges no fees if you make payments on time.
Recently, Square announced it was buying Afterpay for $29 billion, and said it intends to fold Afterpay into their Cash App, so that Cash App users will have access to BNPL services.
Affirm, another popular BNPL company, went public in 2021 Some of the merchants that use Affirm include Peloton, Amazon, and Walmart.
Founded in 2012, Affirm bills itself as “more than just Pay-in-4” and offers short-term loans. It has financed around 17 million transactions and offers a credit limit of $17,500 that can be paid with interest rates ranging from 0% to 30%. Affirm offers loan terms of three, six, or 12 months without any extra fees.
Affirm has expanded service with a branded Affirm Debit+ Card, which is linked to your checking account and allows you to split eligible in-store purchases into four payments, paid every two weeks. To qualify, you’ll have to join a waitlist.
Sezzle also lets customers put a down payment on an item — through one of its affiliated merchants — and then pay it off over six weeks.
The loans are interest-free, and there are no fees unless a payment is missed or rescheduled too many times.
Sezzle only works for customers in the U.S. and Canada.
Sezzle’s payment plans run for four installments over six weeks with the first payment of 25% of the total.
Sezzle can be used online with any of its affiliates: Target, Keen, and GameStop. Or you can use the service in affiliated stores by accessing a virtual card within the app.
The card ties to your Google Pay or ApplePay account, which lets you tap your phone for payment at checkout.
Sezzle’s loans are interest-free, so you won’t be charged interest on any item you purchase unless you fail to make a payment on time or reschedule a payment more than once.
When Sezzle charges a fee, the company automatically rolls it into your next payment.
Citi Flex Pay
Flex Pay lets you place a large purchase on your Citi credit card, then pay it off over a set time with fixed payments and a fixed interest rate.
Citi Flex Pay charges a lower interest rate than you’d pay if you carried the balance on your normal credit card, at the standard credit card rate.
It also has a fixed interest rate as opposed to the variable interest rate you pay on your normal card balance, and there’s a separate application or credit bureau inquiry. It has flexible payback periods of one to three years.
Smaller charges of less than $75 won’t trigger an offer for Flex Pay, and when you use Flex Pay, your available credit on the card will be reduced by the amount of the Flex Pay balance. This can increase your credit utilization rate.
Other major credit card issuers are branching out into BNPL:
- American Express: Amex offers a Plan It option. The feature allows you to split eligible purchases into an installment plan with no interest and pay it off in a series of monthly payments.
- Chase: My Chase Plan allows Chase cardholders to pay off purchases of $100 or more in installments for a fixed monthly fee. Chase charges a small fee to participate.
Risks of BNPL services
BNPLs sound great in theory, but there’s definitely a downside.
For example, one user selected BNPL provider Affirm to split a $1,000 annual subscription cost over 18 months — committing to a monthly payment of $69.67.
While she thought the plan was interest-free, it turned out she was paying a 30% APR (an extra $254.06 in interest), and when the subscription ended 12 months later, she was billed for renewal but still had six payments remaining on the previous year.
Can BNPL loans hurt your credit?
Yes, if you don’t pay the money back as per the upfront agreement, your credit score will take a hit and you may have to pay late fees.
There’s no hard credit inquiry, but there are also fewer consumer protections or fraud safeguards like you would get from a credit card issuer.
Companies will run a soft credit check and report late payments to the credit bureaus, which will affect your credit history and remain on your credit report for up to seven years.
That said, most BNPLs don’t report your payment history to the major credit reporting companies, but failure to repay may be reported by a debt collector, and that will end up on your credit report.
Credit cards vs. BNPL
If you’re weighing whether to use a credit card or BNPL plan, the first thing to consider is the terms. Will you pay a fee or interest? How long do you have to pay the item in full? And does the BNPL purchase just automatically charge your credit card anyway? If you’re carrying a balance on that card, you’ll still end up paying interest on your purchases. And if you have a credit card with a 0% introductory rate on purchases or a good rewards card, BNPL could end up costing you more, particularly if you can afford to pay for the item in full at the time of purchase.
Advantages of BNPL
BNPLs are great for big-ticket items — like car parts — that you need right away. The most popular BNPL purchases include technology, furniture, and home goods and apparel.
Because many of these plans don’t require any interest payments at all, you can save some money vs. what you’d pay with a traditional credit card. Plus these offers are often available to consumers who don’t qualify for credit cards or other loans based on credit history, or lack of one.
The biggest advantage is the ease of use. It’s usually just a matter of clicking a button. And, for the most part, BNPL companies advertise no late fees, no prepayment fees, no annual fees, no hidden charges. As long as you read the terms and conditions, they can be a good deal if used carefully.
In some cases, BNPL can help people pay for medical bills, emergency trips, or car repairs that can’t wait until you’ve saved the full amount.
Before you commit to a BNPL plan
Make sure you know the steps to protect yourself so you don’t get yourself into a budget crunch.
Read the fine print
Make sure to read the fine print for the interest rate or if there won’t be any before purchasing.
Also, if your payment is late or you default, you will need to pay the original terms and conditions.
Review your budget
If you plan to make any BNPL purchase review your budget and what funds you must ensure you’ll have the money to make the upcoming payment.
Establish a repayment plan
Make sure you understand the repayment terms to which you’re agreeing. Don’t assume that the terms will match those of a plan you’ve used in the past.
Some require you to pay the remaining balance with bi-weekly payments over a month-long period. Others may give three or six months, or longer to pay off purchases. And your interest rate, if there is one, might vary depending on loan terms.
Know what happens if you miss a payment. In some instances it could result in late fees, and it could be reported to the credit bureaus, which could hurt your credit score.
The bottom line
Overall, BNPL plans let consumers make purchases online or in stores and pay them off in a series of installments. These short-term loans may require no credit check to qualify and/or charge no interest on purchases.
But you need to use caution to ensure that you understand the commitment, potential costs, and don’t overspend just because it’s easy and convenient.
Because most Buy Now Pay Later plans don’t check credit, almost all are available to users who have low credit scores. They can be a better option than a payday loan if you’re in a true crisis and need to make an emergency purchase, like a new car battery so you can continue to get to work.
Yes, Amazon offers its own service that allows customers to make five monthly payments over four months on eligible products. It works similarly to the payment plans offered by Affirm and PayPal Pay in 4, in that you split up a purchase into separate payments. The service charges no interest, however, you may be charged interest on the credit card you link to the service if you don’t pay off your balance every month.
Buy Now, Pay Later plans are similar to rent-to-own plans in that you can collect your item once you’ve made a deposit. There’s no waiting period to collect the merchandise.
But while many Buy Now, Pay Later plans don’t charge interest and are paid off over six weeks, rent-to-own plans include finance charges and interest, and you aren’t actually committing to a purchase. Instead, you’re agreeing to pay rent on the item. If you make all the scheduled payments in full, the item becomes yours. But the user can also choose to stop making payments and return the item to the store, or have the item repossessed.
Rent-to-own plans may require a deposit to get started depending on the store or vendor.