What Is Buy Now, Pay Later? How does it work?

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woman with brown coat and scarf on and pocketbook on her shoulder with phone in her hand, standing outside

Seeing an item you want but not having the cash to buy it can be frustrating. But, Buy Now, Pay Later programs put those days behind you, allowing you to spread the payments out for the item.


You’ll likely see advertisements for this option in-store and online, so it’s important to know how it works.


Buy Now, Pay Later isn’t a credit card, and most lenders don’t do a credit check. 


Here’s everything you must know about the program and how it works.


What is Buy Now Pay Later?

Buy Now, Pay Later is an installment loan; it’s not revolving debt like a credit card. It’s similar to layaway, except instead of leaving and waiting for the item until you pay it in full, you get to take it home immediately.


Most Buy Now, Pay Later plans divide your total into four payments, and some providers don’t charge interest or fees to do it. BNPL is available online and in stores, and each store may use a different app for it.


How Does it Work?

Most BNPL apps use the ‘pay in four’ model. This means you pay 25% of the purchase when you buy it and another 25% every two weeks. Some apps require automatic payment, which means they withdraw the payment right from your bank account every two weeks. Others allow you to pay manually, but you must make your payments on time.


If you choose the ‘pay in four’ installment plan, you typically won’t pay interest or fees. So unlike a credit card, the plan won’t cost you extra.


However, some Buy Now, Pay Later plans allow longer installment loans, such as paying over 12 months. Unfortunately, these plans usually charge interest. You can see your options at checkout, including the total interest you’d pay.


How to Apply for Buy Now Pay Later

If you want to use Buy Now, Pay Later, you apply at checkout when shopping online and if you want to shop in-store, you can apply on the app before you shop. Then you have a virtual card to use at checkout. This way, you know how much you can afford before shopping.


To apply, you’ll provide the following:

  • Full name

  • Address

  • Birth date

  • Social security number

  • Your payment method


Most BNPL apps do a soft credit check. This doesn’t hurt your credit score but helps them determine if you’re a good risk. 


Pros and Cons of Buy Now Pay Later

Like any payment plan, Buy Now, Pay Later programs have advantages and disadvantages. Here’s what you should know.


Pros:

  • No interest – The ‘pay in four’ option doesn’t charge interest, so you aren’t paying more for the item. Instead, it allows you to spread the payments and afford what you want now.


  • No late fees – Many BNPL plans don’t charge late fees. While that’s a good thing, if you miss a payment, you reduce your chances of getting approved again if you need the plan in the future.


  • No hard credit check – Most BNPL apps don’t do a hard credit inquiry. This means the loan won’t show up on your credit or hurt it if you use the loan properly.


  • Easy to use – You get answers instantly when you apply for BNPL, and if approved, you can walk out with your purchase paying only 25% of the price.


Cons:

  • Encourages impulse purchases – If you can’t afford an item, it’s best to create a Sinking Fund than to start a payment plan. Unfortunately, BNPL makes it much easier to make those impulse purchases, putting you into debt.


  • Late payments hurt your credit – Some BNPL plans report late or missed payments, and send your account to collections if you don’t make up the payments. Since most collection agencies report to the credit bureaus, it can hurt your credit.


  • Doesn’t build credit – Majority of BNPL apps don’t report to the credit bureaus so it won’t help you build credit. They never report the ‘good payments’ to the credit bureaus; they only report if you don’t make your payments.


Popular Apps for Buy Now Pay Later

Hundreds of apps offer Buy Now, Pay Later today, and some credit cards also offer the option.


Here are the most popular apps to consider.


Klarna

Klarna works at popular stores like Bed Bath & Beyond, Etsy, Nike, Instacart, and Macy’s. They offer the traditional ‘pay in four’ model and the option to extend your due date if you run into trouble.


Klarna doesn’t pull your credit or charge interest but charges late fees. However, they will report to TransUnion if you miss a payment. 


Affirm

Affirm is available online and in stores. They offer ‘pay in four’ or monthly installments with interest. In addition, they offer the option for autopay but don’t charge late fees if you miss a payment.


Affirm works at stores like eBay, Amazon, Home Depot, Apple, Walmart, and Target. Affirm is transparent with their costs if you choose any plan other than ‘pay in four,’ and it doesn’t hurt your credit to apply. However, they will report to Experian if you miss a payment.


Afterpay

Afterpay works at popular stores like Target, Ulta, Nike, and Macy’s. They offer a ‘pay in four’ option or installment payments. The ‘pay in four’ doesn’t charge interest or fees, and they disclose the total cost of installment payments before you accept the offer.


Afterpay doesn’t charge fees when you pay on time, and they limit their late fees to help you get back on track.


Final Thoughts

Buy Now Pay Later may be a good option when you know you have the room in your budget to pay the loan off over the next six weeks. In addition, it can save you money if you don’t use it to make impulse purchases. 


Comparing BNPL to credit cards, you’ll save money on interest, and it won’t affect your credit. If you make your payments on time, the account doesn’t appear on your credit report. Also, if you’re trying to limit your credit card utilization rate while being able to purchase the things you need, this might be a good option for you. Like any loan or credit line, consider your options carefully and make sure you can afford the payments before using BNPL.