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Buy now, pay later (BNPL) services allow you to make purchases now and pay them off in fixed payments over a set term. BNPL plans are also called point-of-sale loans because they appear as a payment option during checkout at participating retailers.
Alongside their convenience, buy now, pay later plans usually do not charge interest. Here's how BNPL works and how it compares with other financing options.
How Does Buy Now, Pay Later Work?
Buy now, pay later is a way to make a purchase and pay it back over time. BNPL is a type of installment loan with fixed, predictable payments that you repay over a set period. Participating online and in-person retailers offer the option at checkout.
You can think of BNPL as similar to a layaway, where you pay a merchant for a purchase over time rather than immediately upfront. Unlike a layaway, though, with BNPL, you get your items right away.
Though plan structures vary, a BNPL arrangement may require you to pay 25% upfront and then pay the remaining cost of the purchase in three equal payments every two weeks over the following six weeks. The simplest way to pay back your purchase is to link your bank account, debit card or credit card to your BNPL plan for automatic payments. Some services may also allow you to mail them a check.
BNPL plans do not normally charge interest, but if you miss payments, you could get hit with fees or a penalty interest rate—and possibly even deferred interest. Because BNPL terms vary, it's important to check the terms of the specific plan for information.
Likely due to their convenience, and the fact that they don't require a credit history and don't charge interest, BNPL plans have surged in popularity in both online shopping and physical stores. While BNPL can be a helpful way to reduce immediate strain on your bank account, experts caution that it's important to use BNPL with a solid budget plan to avoid accumulating payments you may not be able to keep up with.
How to Use Buy Now, Pay Later
While the specifics vary among providers, here's an overview of how to pay with BNPL:
- See if the retailer offers BNPL. The most popular BNPL services include Affirm, Afterpay, PayPal's Pay in 4, Sezzle and Zip. You may be offered these plans as options when you check out online or in store.
You can also download service-specific mobile apps, such as Afterpay, which allows you to pay at the cash register in brick-and-mortar shops or with online retailers, similar to paying with Apple Pay.
- Get approved. If you haven't used a particular service before, clicking the button to pay with BNPL in your online cart or navigating to the service's app will prompt you to register for an account. You'll need to provide information to prove your identity, such as your date of birth and phone number.
You'll also need to link a bank account or a debit card for making payments. You may be able to use a credit card, but check your credit card terms as some won't allow it. If you're a returning customer, you'll usually just need to log in with your phone number.
- Review the plan's structure. BNPL plans have varying payment structures, so it's important to read the terms carefully. Treat them like you would any loan agreement and look for information on payment terms, potential interest and late fees. In addition, pay close attention to the repayment structure and amounts.
- Make on-time payments. Once you complete your purchase and receive an order confirmation, the ball is in your court. Keep track of how much you owe and earmark the funds to make payments. It's wise to set up autopay and then put reminders in your phone calendar to avoid forgetting about a payment.
How Much Does BNPL Cost?
BNPL costs and fees vary among providers, so it's vital to read the terms before you apply. Here are the costs for the most common BNPL plans as of September 2022:
|Buy Now, Pay Later Costs and Terms|
|Service||Interest Rate||Late Fee||Loan Term|
|Affirm||0% - 36%||None||1 - 48 months|
|Afterpay||0%||Lesser of $8 or 25% of transaction||6 weeks|
|Sezzle||0%||$10 account reactivation fee, and $5 returned payment fees||6 weeks|
|Paypal Pay in 4||0%||None||6 weeks|
Buy Now, Pay Later vs. Credit Cards
There are some key differences between BNPL and credit cards.
- It's typically easier to get approved for BNPL than many credit cards.
- BNPL is essentially an installment loan you repay on a set schedule with equal payments. Credit cards are a type of revolving credit, which allows you to borrow repeatedly up to a set credit limit while making at least minimum payments.
- BNPL requires you to set up a new agreement (with its own terms) each time you use it to make a purchase, which means tracking payment due dates for multiple purchases. Credit cards allow you to make purchases up to your credit limit and receive one bill per month to pay for those purchases.
- BNPL typically doesn't charge interest. Credit cards charge interest on purchases that revolve, or are not paid by the card's due date (with the exception of 0% introductory APR cards).
- Credit cards offer user perks and benefits such as rewards, purchase protection, travel protection and more, while BNPL does not.
- Credit cards typically require a credit check when you apply; BNPL usually does not.
Should You Use Buy Now, Pay Later?
Whether or not you should use buy now, pay later comes down to your goals in financing a purchase alongside your individual financial situation.
Two BNPL perks are the convenience of applying quickly at checkout and the fact that its fixed payments usually carry no interest. But these perks aren't particularly beneficial if you use BNPL to take on a balance that you can't afford to repay. Experts caution that seeing your purchase total broken down into chunks can give you the impression that footing the bill will be simpler than it is, or make the overall price of your purchase feel lower.
In reality, when those payments come out of your next paycheck, you may find yourself overextended. The best strategy to avoid this is to create a budget and earmark funds to make payments. Another good option is to forgo BNPL by using a rewards credit card and then paying off the balance each month to get more out of your spending without paying interest. Finally, it may be wise to simply save up the money first, then make the purchase using a debit card or cash.
Alternative Financing Options
While BNPL can be a helpful way to finance a purchase, other financing options have features worth considering. These options typically take more time to apply and be approved for, and often require a credit history the lender can review during the approval process. If you have no credit or a low credit score, you may have difficulty getting approved.
- A 0% intro APR credit card can help you finance purchases and then pay down the balance over time without accruing interest during the introductory period. Note that any balance remaining when the intro period ends will be subject to the card's standard APR.
- A rewards credit card can help you finance a purchase while earning cash back, points or miles on your purchases. In addition to getting more out of your spending, responsible credit card use is a good strategy for building credit.
- A low-interest personal loan can be a smart option for financing large purchases, if your credit score qualifies you for good terms. While you'll pay interest on a personal loan, it may offer more buying power than BNPL depending on what you are looking to finance.
The Bottom Line
Buy now, pay later plans can be a convenient way to pay, as long as you read the terms closely, use a budget to plan your spending and keep track of your repayment schedule. Alternative financing options such as a credit card or personal loan are tried-and-true financing options that, when managed well, have benefits worth considering. And remember that regardless of the financing option, it's always wise to hit pause and consider your full financial picture before you spend.
Before you settle on a financing option, check your credit score for free through Experian. If your credit score could use a lift, consider options for increasing it, such as a secured credit card. You may also be able to raise your raise score instantly by using Experian Boost®ø to get credit for bills you already pay.