As its name suggests, “buy now, pay later” lets you make a purchase and receive it immediately, but pay for it later, usually over a series of installments. Though this payment plan has been available for years, it exploded in popularity during the pandemic as more people shifted to online shopping. As a result, most major retailers now offer some buy now, pay later plan, but whether you should opt-in depends on the plan and your financial situation.
What is buy now, pay later?
Buy now, pay later, or BNPL is an installment loan. It divides your purchase into multiple equal payments, with the first due at checkout. The remaining charges are billed to your debit or credit card until your purchase is paid in full. These plans can come with interest and late fees, though some plans charge neither depending on the provider.
You’ll mostly see BNPL payment plans when you shop online, although some plans are available in stores. You can also find BNPL payments options for travel and BNPL for health care.
How does buy now, pay later work?
During check out, you’ll see an option to break up your total purchase and pay a smaller amount now instead of the full balance. First, you’ll fill out a short application directly on the checkout screen if interested. It may ask for your name, address, date of birth, and phone number. You will also provide a payment method. Then, the BNPL provider may perform a soft credit check, which won’t affect your credit score, and approve or deny your application in seconds. Approval criteria vary, but you may still be eligible even if you have bad credit or no credit. The plan you are offered will also vary by provider, but many companies offer a “Pay in 4” model, which divides your purchase into four equal installments, each due two weeks apart, with the first payment due immediately. For example, if your total purchase is $300, you will pay $75 at checkout, then have three remaining payments of $75, each due two weeks apart. As long as you make all payments on time, you will have paid off your purchase in six weeks. While Pay in 4 doesn’t usually charge interest, other BNPL plans can charge an annual percentage rate of up to 30%. Late fees range from $7 to $8 and are usually capped at 25% of the order value.
Should you buy now, pay later?
There are several things to consider when deciding whether to choose a BNPL payment plan. First, we recommend using BNPL only for necessary expenses, like a mattress for your apartment or a computer for school. Though the plan may seem low-cost and straightforward, you’re still taking on debt, and it’s rarely a good idea to go into debt for a nonessential purchase. You’ll also want to look for a BNPL plan with zero to minimal interest. This will lower your monthly payments and make it easier for you to pay back the loan. If you’re struggling to pay your bills or start an emergency fund, steer clear of buy now pay later. Because of its ease and convenience, it’s possible to overspend with BNPL. As a result, you may incur high late fees or be sent to collections, which will hurt your credit score. Here’s a breakdown of the pros and cons.
- Zero-interest plans available.
- No minimum credit score is required.
- Offered at most major retailers during online checkout.
- Some plans may charge interest.
- Some plans may assess late fees.
- Payments may not be reported to the three main credit bureaus.
- Easy to overspend.
Paying with alternatives like credit cards may be a more brilliant financing choice for some shoppers. Most credit cards earn rewards or cashback, but they also report on-time payments to the credit bureaus, which not all BNPL companies do. A history of on-time payments can help build your credit score and open the door to more affordable financing options in the future.