Millions of American shoppers are using “buy now, pay later” payment options — and opening themselves up to financial risk in the process.
In fact, nearly half of all U.S. consumers have made a purchase with a buy now, pay later option, according to a recent CreditKarma study. Among those, over a third have fallen behind on one or more payments.
These alternative payment plans from fintech startups — which allow you to pay for your purchase over time, typically without interest — have exploded in popularity over the past year. Buy now, pay later services grew 215% year-over-year within the first two months of 2021, an Adobe analysis suggests. Retailers big and small are using installment plans to increase sales, from Amazon and Walmart to local boutique stores. And with holiday shopping already in full swing for many, you may be considering them to help offset costs this season.
Buy now, pay later (BNPL) services promise convenience and an alternative to credit with no interest or surprise fees. And unlike layaway options, you’ll get your purchase upfront, instead of having to wait until it’s paid in full.
It’s all about instant gratification, says Carrie Rattle, a financial therapist in New York with a focus on overshopping. “When losses are pushed out over weeks or months, they seem like less. It’s [a] perception of greater affordability that is not reality.”
Here’s what you need to know about buy now, pay later — and why you should take caution before using these alternative payment plans.
How Does Buy Now, Pay Later Work?
When you opt into buy now, pay later — also known as a point-of-sale installment loan — you agree to the terms of a payment plan when you make a purchase, then pay it off over time in weekly, bi-weekly, or monthly installments. In most cases, the purchase must be over a certain amount to qualify.
Online BNPL options typically appear at the checkout page on a participating retailer’s website. If you’re shopping in-person at a participating retailer, you’ll likely have to download an app to enroll. Some of the most popular BNPL providers include Affirm, Afterpay, Zip (previously known as Quadpay), PayPal’s “Pay in 4,” and Sezzle.
We reached out to each of the above companies for more information about potential risks faced by customers who might use BNPL to make purchases they can’t afford. Most companies didn’t respond before publishing, though a spokesperson for Sezzle said its users are gradually able to use BNPL on larger purchases, based on individual repayment performance over time. A spokesperson for Affirm stated it only approves customers for what it believes they can “comfortably afford to repay.”
“This is not a new concept,” says Jon Schlossberg, co-founder and CEO of financial wellness technology startup Even. It’s a tactic retailers use to encourage customers to spend more, he says. “In order to get people to buy more stuff, a vendor will offer a merchant the ability to allow customers to pay in installments for either a very low interest rate or in some cases no interest.”
Payment plans vary by company, but often consist of four installments, with each payment covering 25% of the total transaction, including taxes. You have to pay the first installment when you checkout, and the remaining installments are due every two weeks after that.
For example, if you make a $100 purchase, you might pay $25 at checkout, then three additional installments of $25 over the course of six weeks. Each installment may be automatically charged to the debit or credit card you used to make your purchase.
Risks of Buy Now, Pay Later
If you’re easily tempted to overspend, make impulse purchases, or if you don’t keep track of your finances, BNPL can make it easier to buy things you can’t actually afford. Studies have shown that when consumers pay in installments, they typically spend more.
“The more you buy now, pay later, the more likely you are going to get into debt,” says Rattle. She says the instant gratification of the purchase can make it easy to overlook your commitment to the plan’s terms, and risk interest or fees when you miss payments.
And while many plans don’t charge interest on purchases — just late fees if you fail to pay on time — that’s not always guaranteed either. Affirm is one of the few platforms that doesn’t charge late fees, and it offers zero-interest financing options, but depending on the retailer and purchase amount, may charge up to 30% interest. Depending on the BNPL platform, fees can range from a few dollars to upwards of 25% of the transaction. Some apps even charge users a fee each time you use a plan. Zip, for example, charges a $1 fee per payment on your installment plan.
CreditKarma data also shows younger generations may be more likely to miss payments. More than half of Gen Z and millennial respondents who have used BNPL say they have missed at least one payment, compared to 22% of Gen X and just 10% of Boomers.
“People aren’t sufficiently planning ahead for the reality of needing to pay for this thing, and so they end up falling behind on their payments and it ends up affecting their credit score,” says Schlossberg.
Can Buy Now, Pay Later Affect Your Credit?
Just like credit cards or personal loans, BNPL installment plans are borrowed money that you’ll need to pay back in the time you agree to upfront. And if you don’t, you may get charged fees and your credit score could even take a hit.
The biggest difference is that BNPL plans don’t require a hard inquiry on your credit to see if you qualify. But these companies also don’t offer the same consumer protections as a traditional lender or credit card issuer, like dispute resolution or safeguards against fraud.
While there’s typically no hard inquiry on your credit score when you sign up for a plan, some companies do report late or missed payments to the credit bureaus — just like regular loans. According to Affirm’s website, the company “may report your payment history to Experian” and “may report loans with delinquent payments, which may have an impact on your credit.”
Advantages of Buy Now, Pay Later
Despite the potential costs, BNPL is an attractive option, particularly when shopping online or buying big-ticket items.
It essentially removes any barrier that discourages customers from clicking the “buy” button, and data suggests many are drawn to the platforms for their convenience. The most popular purchases with buy now pay later are home and furniture goods, electronics and apparel, the Credit Karma study shows.
If you know you’ll have the cash to pay down your installment plan on time and in full, BNPL can be an effective way to spread your payments out over time. It’s a similar concept to 0% intro APR offers on credit cards, which may be an even better option for spreading out payments on purchases, because you can earn points on your purchases and get added consumer protections like extended warranties. But for either payment option to work, it’s imperative that you have a plan and means to pay it off in full and on time.
“It can help someone if they know how to manage their money,” says Rattle. “If you track your finances and you know you’re capable of doing this, it’s great because you can get the items that you really need and you can manage your payments.”
3 Things to Do Before Signing Up for Buy Now, Pay Later
Review Your Budget
Because BNPL is still a form of debt, you need to be realistic about what you can afford.
“When you’re living paycheck to paycheck, as one in three Americans are, it’s very hard to make consistent payments in addition to the bills that you already have and the high cost of living that exists today,” Schlossberg says.
BNPL can be useful if you can afford to make your purchase in full, but paying in installments would help you better manage your cash flow. Before signing up, review your budget to make sure you can afford the payments during the suggested time frame along with your other financial obligations.
Make a Repayment Plan
Whenever you take on debt, it’s important to establish a repayment strategy. Repayment schedules for BNPL vary from company to company but many are often biweekly or monthly. To avoid missing a payment, have a clear understanding of your due dates and what you’ll owe with each installment before you sign up. Include your payments in your monthly budget for tracking purposes until it’s paid off.
Review the Fine Print
Know what you’re agreeing to before you buy. Terms of BNPL services, such as fees and interest, may not be transparent at checkout, so take the time to dig a little deeper and read the fine print before you opt in.
A clear understanding of any fees or interest you could incur for using the service will help you avoid any surprise costs later on. “You always want to do your homework,” says Rattle.
Buy now, pay later plans can be an effective way to spread out the cost of a large purchase over time, but they also make it easy to impulse buy items that you can’t actually afford.
Before you sign up, review your budget, the exact costs involved, and have a repayment strategy in place. That way, you can better ensure your ability to pay off the loan in time and avoid interest charges, late fees, or any negative credit effects.
“It’s a flexible tool,” says Rattle, “but if you don’t know that you can afford it and you don’t pay attention and you don’t do your homework first, I wouldn’t go near them.”