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Using a buy now, pay later (BNPL) option like Klarna, Afterpay, Affirm or Sezzle allows you to pay for a purchase over time—but can it help you save money?
When used strategically, buy now, pay later platforms may save you money by helping you avoid credit card interest and maintain a better cash flow. Here's what you need to know about how BNPL platforms work.
How Does BNPL Work?
Buy now, pay later services, also known as point-of-sale loans, allow you to break up a purchase into several installments, often without interest charges. You may be offered BNPL options when you're checking out in a store or online.
During checkout, buy now, pay later options will generally be presented alongside options to enter a credit card. When you opt for buy now, pay later you will likely be taken to the BNPL site to log in or create an account. In your account, you can add a payment method such as your credit card or bank account.
It's important to add an account that will maintain enough funds for the future payments. That's because payments will typically be automatically debited on the scheduled date. You may be able to pay ahead of time if you want, however.
A popular BNPL payment schedule is 25% due at checkout, 25% in two weeks, 25% in four weeks and the final 25% in six weeks. Buy now, pay later plans may be interest-free, but usually come with fees if you miss a payment. Check your account settings to make sure you will receive a reminder notification about your upcoming payment.
BNPL financing does not require a hard credit check when you apply, which is one reason why people find buy now, pay later platforms attractive when they need to finance a purchase.
Can BNPL Save You Money?
On paper, buy now, pay later is not designed to save you money. You still pay the full price of your purchase, but it is broken up over time. Instead, a BNPL plan can indirectly help save you money by avoiding other costs associated with financing purchases:
- Credit card interest: If your only other option for paying for a purchase at the point of sale is a credit card—and you would need to carry a balance for at least a couple months—you can save with BNPL as long as you make all your payments on time. At the time of this writing, the average credit card interest rate was just over 16%, meaning financing large purchases on credit cards can cause debts to rack up quickly.
- Bank fees: Buy now, pay later services can also help you better manage your cash flow. Instead of having one large purchase hit your bank account all at once and possibly put you at risk of overdraft fees, only a portion at a time will be debited. If your plan is on a two-week payment cycle, you may receive a paycheck in the interim to help you prepare for the next payment.
Along with the advantages of stretching out a payment using buy now, pay later, there also comes some potential downsides, like:
- Possible missed payments: With frequent, small payments, it's not uncommon for users to miss a payment. If you miss too many payments, your account could be sent to collections and show up on credit reports, negatively impacting your credit scores.
- Fees and overdrafts: If you can't make the required payments, you may end up paying more when you use buy now, pay later options due to associated late fees or accidental overdrafts. Unfortunately, 1 in 5 buy now, pay later borrowers have missed a payment and 1 in 3 users have overdrawn their bank account in the same period of time, according to research from Morning Consult.
- No credit card rewards: Opting for buy now, pay later may mean missing out on potential credit card rewards, such as cash back or miles.
What Are Other Ways to Save on Purchases?
If buy now, pay later isn't for you, there are other ways to save on purchases or even break up payments. These include:
- Getting an introductory 0% APR credit card: When you have a big purchase looming, a credit card with an introductory 0% APR can be a great option. These cards may offer up to 21 months without interest, making them ideal for a large purchase right after opening. Doing so can help you save money on interest if you pay off the purchase before the intro period ends and the rate changes to the card's standard rate. Improve your credit before applying to increase your odds of approval.
- Using a credit card and paying it off immediately: If you just need a few days to get the money for a purchase you want to make today, using your credit card to bridge that short period can be a smart money move—if you know you have the means to pay off the balance before your payment is due.
- Using your credit card's pay over time plan: A credit card or line of credit you already have may also offer a pay over time plan. Much like buy now, pay later plans, these allow you to break a purchase into smaller installments—but they're offered by your credit card rather than a BNPL company. The plan may offer 0% interest for a period of time, come with a low fixed fee or use a combination of fees and interest on carried balances.
- Saving up: Good things come to those who wait and save for purchases. If there's something you want to buy but which you don't currently have the money for, saving up until you can pay in cash is the cheapest and easiest way to purchase it. Worried about losing credit card rewards? Wait until you've saved the amount needed, make the purchase on your card and then immediately pay it off with your savings.
- Budgeting an "extras" category: You never know what might strike your fancy, but when you include an "extras" category in your monthly budget, you can have some designated cash on hand to buy something you didn't expect to spend on in a given month.
Some purchases can't wait, so if you decide to use buy now, pay later, be sure you've got a plan to meet your upcoming payments. Buy now, pay later can help you save money as long as it's part of an otherwise sound spending plan.