How Buy Now, Pay Later Works - Investopedia

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"Buy now, pay later" (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. Also referred to as point of sale installment loans, buy now, pay later arrangements are becoming an increasingly popular payment option, especially when shopping online. Using BNPL financing can be convenient for consumers, but there are some potential downsides to consider.

Key Takeaways

• Buy now, pay later arrangements are point of sale installment loans that allow consumers to make purchases and pay for them at a future date.
• Consumers typically make an upfront payment toward the purchase, then pay the remainder off in a predetermined number of installments.
• Buy now pay later plans often don't charge interest, and are often easier to get approved for than traditional credit cards or lines of credit.
• Normally, BNPL doesn't affect your credit score; however, late payments or failing to pay can be damaging to your credit score.

What Is Buy Now, Pay Later?

Buy now, pay later is a financing arrangement that allows consumers to make purchases without paying for them all at once. There are a number of companies, including Klarna and Affirm, that offer buy now, pay later financing on purchases made from participating merchants. PayPal has introduced its own point of sale installment loan program. Some credit card issuers, such as Chase and American Express, have also set up similar financing arrangements.

Tip

Buy now, pay later financing that's offered through a credit card company may carry lower fees or interest rates compared to the regular variable APR charged on outstanding balances.

How Buy Now, Pay Later Works

Buy now, pay later programs aren't all exactly the same, as each company has its own terms and conditions. But generally, point of sale installment loans operate along the following lines:

• You make a purchase at a participating retailer and opt for buy now, pay later at checkout
• If approved (you're told in seconds), you make a small down payment, such as 25% of the overall purchase amount
• You then pay off the remaining amount due in a series of interest-free installments
• You can pay via a check or bank transfer; payments can also be deducted from your debit card, bank account, or credit card automatically

Although they both involve delayed payments, BNPL is different from making a purchase with a credit card. When you use a credit card to pay for things, you're only required to make the minimum payment due on the card each month. Interest accrues on the remaining amount (unless you've used a card with a 0% introductory APR) until you pay it off in full. But you can carry a balance indefinitely.

In contrast, BNPL arrangements often don't charge interest or fees. But they have a fixed repayment schedule—generally several weeks or months. You're told upfront what you'll need to pay each time, and it's usually the same amount. It's comparable to any other sort of nonsecured personal or consumer loan.

Most buy now, pay later companies only require a soft credit check for approval, which doesn't affect your credit score. However, others may conduct a hard pull of your credit, which could knock a few points off your score temporarily.

Not all purchases may be eligible for buy now pay later financing. And there may be limits on the amount you can finance this way. But buy now, pay later can be an attractive way to pay for smaller purchases when shopping online, and its popularity has grown during the COVID-19 pandemic, with the rise of e-commerce in general.

Note

Thirty-nine percent of Americans say they've tried BNPL at least once, according to an early 2021 survey conducted by The Strawhecker Group.

Buy Now, Pay Later Special Considerations

There are some things to be aware of before entering into a BNPL arrangement.

First, it's important to understand the repayment terms you're agreeing to. Again, these can be different for every buy now, pay later company. For example, some companies may require you to pay the remaining balance with biweekly payments over a month-long period. Others may give you three months, six months or even longer to pay off purchases. And your interest rate, if there is one, might vary depending on the loan terms.

It's also necessary to know how your payments will work so that you can plan for them in your budget. This ensures that not only are you able to afford your payments, but you can also make them on time. Missing a payment for a buy now, pay later agreement could result in late fees. Your late payment history could also be reported to the credit bureaus, which could hurt your credit score.

55%

The number of consumers who say they tended to spend more using buy now pay later than they ordinarily would using other payment methods.

Also, keep in mind that while you may be approved for a 0% interest point of sale installment loan, that's not guaranteed. Buy now, pay later platforms can charge interest on purchases which could easily match or outpace what you might pay with a credit card. And unlike a credit card, you're not earning any rewards on purchases you make using buy now, pay later arrangements.

Finally, consider return policies and how buy now, pay later might affect your ability to return something you've purchased. It's possible that the merchant may allow you to return the item but you wouldn't be able to cancel the buy now pay later arrangement until you can provide proof that the return has been accepted and processed.

Buy Now, Pay Later Advantages and Disadvantages

Buy now, pay later financing agreements allow consumers to pay for things over time without interest charges. And it's possible to get approved for this type of financing even if you've been shut out of other loan options due to a low credit score. BNPL loans don't add to your credit card debt and affect your credit score, normally; in fact, they're often too brief to be reported to the credit bureaus at all.

On the downside, getting them and paying them off doesn't help you establish and build good credit, either (as more conventional financing methods do). You also miss out on any perks, like cash-back or rewards points, that credit cards offer.

And if you want to return an item you bought via BNPL, it can get complicated. You should get your money back, of course—but there can be a delay until the merchant informs the BNPL lender of the refund. You may have to keep on making payments, in the meantime. If you don't, the payment might get marked tardy or missing; you could incur fees, and late payments will eventually ding your credit score.

Pros

• Convenient, disciplined way to pay for purchases over time

• Frequently zero-interest or lower interest than credit cards

• Good credit/high credit score not necessary to qualify

• Fast approval

Cons

• Payments can be hard to keep track of

• Missing or late payments result in late fees, damage credit score

• No rewards or cash-back earned on purchases

• Payments may continue even if item is returned

The Bottom Line

The idea behind buy now, pay later is that consumers can get the things they need immediately—while also getting a little extra time to pay for them.

Buy now, pay later financing may seem appealing if you can't or don't want to foot the bill for something all at once: It extends you credit—without imposing steep interest charges but with a repayment schedule so you don't get into a mountain-of-ongoing-debt situation. But consider whether the payments are affordable and what penalties you may face if you're unable to pay. Read the fine print carefully on buy now, pay later financing so you fully understand what you're agreeing to.

Finally, weigh the benefits of point of sale installment loans against the merits of using other financing options instead, such as rewards credit cards or a personal loan.

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