What Is Buy Now, Pay Later?

Written by Kim PinnelliReviewed by Nathan Brown, CFP®Updated: 11th Apr 2022
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Buy now, pay later is the latest payment option at most stores, and it’s heavily advertised. Should you consider it, or is it a scam?

Find out what ‘buy now, pay later’ is, how it works, and why you need to be careful when using these relatively new services to finance a purchase.

What Is Buy Now, Pay Later?

Buy now, pay later as the name suggests allows you to buy something now, take it home, but pay for it in installments. You don’t need a credit card or even perfect credit to qualify. Most companies don’t charge interest, but you must pay the loan back as agreed.

How Does Buy Now, Pay Later Work?

At checkout, either in-store or online, you’ll see the option to break your payment into four equal installments. This basically means applying for an installment loan. You’ll complete some quick information about yourself, and the lender will likely pull your credit, but it’s a soft credit pull.

Your credit score isn’t affected, but the lender can see how you handle your debts and how much debt you have. If approved, they’ll give you options which usually include the pay-in-4 model. This means you pay ¼ of the purchase at checkout, and the rest in equal installments in 3 more payments every two weeks.

Most companies don’t charge interest if you make your payments on time. If you don’t, many charge late fees or will send your account to collections.

Buy Now, Pay Later Pros and Cons

Pros:

  • You might not pay interest
  • You can spread out the payments of a costly purchase
  • You don’t need great credit to qualify
  • Most companies offer instant approval

Cons:

  • You can easily overspend
  • Late payments incur fees and can damage your credit
  • Your payments usually aren’t reported to the credit bureaus

Is Buy Now, Pay Later a Bad Idea?

Taking on new debt is always a cause for concern. If you’re using the buy now, pay later plan to buy a necessity, and you want to make it easier on yourself to pay for it, the plan can be a good idea. If, however, you’re using it to make impulse or unnecessary purchases, it can be a bad idea.

Who Offers Buy Now, Pay Later? Consider these Apps

Affirm

Affirm works with major retailers, but the contract with each store differs. Please don’t assume you’ll get a 0% APR with Affirm because some stores they work with charge as much as 30% interest. Affirm also offers more than the traditional pay-in-4 model. They offer longer-term installment loans at higher interest rates, so make sure you know what you’re getting.

Afterpay

Afterpay works with many popular retailers and only offers the pay-in-4 model. They don’t charge interest on their plans, but they will charge late fees if you miss a payment. Read your agreement closely, too, because Afterpay often states that they will charge the full amount owed to the linked credit card if you default on the loan.

Klarna

Klarna works like Afterpay and is offered at most major retailers. They, too, don’t charge interest and require 25% of the purchase upfront, with the rest paid in equal installments every two weeks. If you miss a payment, they might charge a late fee, and if you default altogether, they’ll charge the full amount owed to your linked credit card.

PayPal

PayPal is a household name, so people commonly turn to this buy now, pay later service. It works much like the other services where you pay 25% at checkout and the remaining in equal installments every two weeks. They don’t charge interest or even late fees.

Sezzle

Sezzle is another buy now, pay later company that doesn’t charge interest or fees, but there’s a catch. If you sign up for the 4-installment plan and don’t make a payment, they deactivate your account. To reactivate it, you must pay $10, so it’s like a late fee.

Zip

Zip is a buy now, pay later plan that is a mobile app. You can use it anywhere Visa is accepted, but every purchase costs you a $1 admin fee. If you miss a payment, they also charge a late fee of $5- $10, depending on where you live.

Should I Use a Buy Now, Pay Later App?

Use buy now, pay later apps with caution. Can they be helpful? Yes, they can, but they can encourage impulse spending too. If you need something that you can’t pay cash for right now and don’t want to risk paying interest, then a buy now, pay later app can help, but make sure you can pay the loan as agreed to avoid unnecessary costs.

Is It Safe to Use Buy Now, Pay Later?

The most common buy now, pay later apps are safe. They use bank-level encryption and don’t share your information with anyone. The largest risk with them is you could get in over your head in debt and end up with a collection on your credit report if you aren’t careful.

Do Buy Now, Pay Later Loans Have High-Interest Rates?

Buy now, pay later loans are known for their 0%, which is great, but not all loans don’t charge interest. Always read the fine print to make sure you’re not paying interest or under what circumstances you would pay it. If you choose any payment structure longer than the four equal installments, though, chances are you will pay interest.

Bottom Line: What Is Buy Now, Pay Later?

Buy now, pay later is a way to spread the cost of items over four payments. It can be a good way to budget and pay items off without paying interest, but if you aren’t careful, it could cost you more than you have.

Always read the fine print and only use the program when you buy a necessity and not just something you want but can’t afford.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.