Making a big payment at once isn’t always an option. 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 point-of-sale payment options 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.
Table of Contents
- Buy Now Pay Later plans let you purchase items immediately but pay them off in four equal installments
- Most BNPL plans don’t charge interest
- They offer the convenience of taking the item home even if you don’t have the money to pay for it in full
- They can be dangerous if you sign up for too many plans at once and fall behind on payments
- They won’t help you improve your credit score, but could damage it significantly if you default on payments
How Buy Now Pay Later works
Buy now, pay later (BNPL) plans are sometimes called “pay-in-four” or “point-of-sale” personal loans. They’re similar to layaway plans in many ways. The main difference is that you get the item right away at checkout rather than having to wait for it.
With BNPL, you essentially take out a short-term installment loan with a bi-weekly repayment schedule. This makes these plans similar to QVC’s longtime “Easy Pay” program, which lets you take your purchase home now and make monthly installment payments until it’s paid off.
Many large online retailers accept these plans, but so do some brick-and-mortar stores. They’ve become so mainstream that you can even use them on small purchases, like spreading out the payments for your $15 Chipotle or UberEats lunch over a six-week timetable.
Some examples of when and where BNPL could come in handy include:
- Planning and paying for a vacation on Expedia or another online travel site
- Purchase apparel or shoes at such retailers as Nike
- Shopping for household goods or furniture at Pottery Barn
- Buying holiday gifts online
With a BNPL, you pay an initial deposit at checkout and then make three more payments every two weeks until the item is repaid. This usually takes six weeks.
Most of these plans come with interest-free payments. However, some charge interest on major purchases or those financed over a longer period. Payments are also typically deducted automatically from your bank account through a debit card or charged directly to your credit card.
These short-term loans are considered a convenient, easy alternative to credit cards. Because of their ease of use, they’ve become increasingly popular, especially since the start of the pandemic. According to a recent survey, Americans use these plans for a variety of reasons, including:
- Technology: 35.76%
- Household goods or furniture: 29.76%
- Apparel: 26.77%
- Holiday shopping: 17.13%
- Vehicle repairs and parts: 10.28%
- Groceries or dining out: 5.14%
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.
Most BNPL plans don’t charge interest
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.
Pro tip: 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 are), and there may be limits on the amount you can finance.
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 buy holiday gifts.
Pro tip: 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.
Top BNPL companies
By now, many of these companies have become household names. Some of the most well-known Buy Now, Pay Later companies include:
PayPal, Sezzle, AfterPay, Affirm, Zip, Klarna, Citi Flex Pay, American Express Plan It and My Chase Plan. Additionally, payment services like Apple Pay and Shop Pay also offer BNPL financing options.
READ MORE: 10 Buy Now Pay Later services you can trust
Risks of BNPL services
BNPLs sound great in theory, but there’s a downside. Many users are unclear on terms and don’t know whether they’re paying interest.
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.
BNPL loans can hurt your credit score , but won’t help it
Most Buy Now Pay Later companies do not report these short-term loans to credit bureaus. This means that if you pay everything back as scheduled, they won’t help your credit score.
However, if you don’t make your payments, your debt will be turned over to debt collectors, your credit score will take a hit and you may have to pay late fees.
There’s no hard credit inquiry, so your credit score won’t affect whether or not you qualify for a plan. However, you will also get fewer consumer protections and fraud safeguards than you’d get if you paid by credit card.
Pro tip: Companies may run a soft credit check, but that won’t affect your credit score
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
Here are the main advantages of using a BNPL plan:
- Can be used for one-time purchases or big-ticket items such as technology, furniture, or home goods
- Most come with 0% APR or interest chargesItems typically come with some kind of purchase protection
- Plans are easy to qualify for as there’s no credit check
- Delayed payments can make it easier to fund a necessary purchase
- They’re fast and convenient
- There are no hidden or late fees as long as you pay on time
- Some platforms, like Affirm, offer longer repayment terms (6 or 12 months) but have interest applied
- Some plans come with promotional offers like a free first or final payment
Disadvantages of BNPL
Before signing up for a BNPL plan, here are some of the biggest disadvantages:
- Purchase protection is limited or tricky since users have to navigate through the merchant’s and lender’s policies
- Some come with hidden interest or high late fees that add up
- It’s easy to overspend or fall further into debt
- Taking on multiple BNPL plans at once could become financially overwhelming and increase the risk of defaulting on payments
- Some platforms don’t indicate what your spending limit is until after approval
- It’s sometimes tricky to keep up with payments, especially if you had trouble affording the item in the first place
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.
- Make sure you understand your 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. 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.
- What happens if you miss a payment? Know what happens if you miss a payment. In some instances, it could result in late fees and 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.