What Is Buy Now, Pay Later?

How Buy Now, Pay Later Works

BNPL plans are short-term financing arrangements that often involve four interest-free equal installments paid biweekly. You might make your first payment either at the time of purchase or two weeks later. The remaining BNPL payments then would be due every two weeks.

Providers such as PayPal, Affirm, AfterPay, and Klarna set their terms and application requirements for BNPL plans. You’ll often encounter minimum or maximum purchase amount requirements. If your purchase qualifies, the application process is often integrated into the merchant’s checkout process. However, the provider may offer other options, such as a virtual card for non-participating merchants. You’ll typically need to be age 18 or older, provide a valid payment source, verify your identity, and give your mobile number to qualify.

The BNPL provider usually does a soft credit check to check your eligibility and determine your approved loan amount, but you may undergo a hard credit check for longer loans. The application process should show the payment plan’s details and disclose any fees and interest. Once you agree to a plan, you continue the checkout process with the merchant. You’ll make any required down payment, then pay your remaining installments using your chosen payment method.

Your provider may charge late fees if you miss a BNPL payment. In addition, your bank could charge you fees for non-sufficient funds, and the BNPL provider may limit your access to future financing. Even though a particular provider may not report your BNPL payment history to the credit bureaus, you could experience credit score damage if the provider sends your account to a collections agency.

Example of Buy Now, Pay Later

Suppose you want to buy a new computer online. You choose a laptop on a technology site and proceed to the checkout, where you see the option to use Affirm.

For your first purchase, you select that option and get prompted to type your phone number to begin the BNPL approval process, receiving a PIN via text to sign in. You proceed with providing personal information to make your Affirm account, and Affirm assesses your eligibility. Future BNPL plan requests are usually a more expedited process.

You get approved for the purchase amount and see plan options. You choose the no-interest plan where you make four biweekly payments with no down payment, and you arrange for automatic payments. After you agree to the terms and finish checking out, your order gets confirmed. Affirm withdraws the first payment on the date shown on your installment agreement. You don’t incur any fees or interest, and payments stop after the fourth one.

Pros and Cons of Buy Now, Pay Later (BNPL)

Pros Explained

• Quick and easy application: Often integrated into the checkout process, the BNPL application process usually only requires providing a few basic personal details. You learn whether you are approved and about the loan terms fairly quickly.
• Potentially no interest or fees: Choosing the typical four-installment payment plan and paying on time may have no interest or fees. This can be a cheaper borrowing alternative to a credit card.
• Convenient credit: This quick credit source is convenient when you want to buy something but you won’t have the funds until your next payday. Unlike when using layaway services, you don’t have to wait to claim your item. In addition, the payback process is convenient when you set up automatic payments.
• Soft credit check: Most traditional credit applications require hard credit checks that hurt your credit score. However, BNPL applications usually use soft checks that aren’t reflected on your credit report.

Cons Explained

• Limited credit reporting: If you want to build credit, your plan provider might not provide payment information to the credit bureaus. If it does, the information may still not reflect in your credit score. However, collections accounts would get reported, which would be reflected negatively.
• Potential fees: The provider may charge a late fee if you miss a payment or don’t have enough funds in your linked payment account. Plus, your bank may charge an overdraft fee. These can all add up.
• Less protection for consumers: While the Consumer Financial Protection Bureau (CFPB) is working on further regulating BNPL plan providers, you may experience fewer consumer protections. For example, your BNPL provider might make you pay installments after a return or purchase dispute, making it harder to get your money back. You may also encounter hidden fees and inadequate disclosures.
• Risk of accumulating debt: It’s easy to overspend when you have easy access to BNPL plans at the checkout stage. You could end up with multiple plans you may have trouble paying off. As a result, you could become heavily indebted and face the resulting fees and credit impact.

Frequently Asked Questions (FAQs)