What is Buy Now, Pay Later?

Buy Now, Pay Later allows you to defer payment over a certain time period. Here’s how to make an informed financial choice the next time you shop.

January 4, 2024

Given the rising cost of living, you may have begun to find some necessary purchases out of reach. To help alleviate that burden, Buy Now, Pay Later (BNPL) has emerged as a popular alternative to traditional payment methods. 

In fact, as as many as 42% of American consumers say they’ve used BNPL at least once. While BNPL offers flexibility and convenience, it’s important to understand the mechanisms, benefits, and potential drawbacks to this payment method. Here’s how to make an informed financial choice the next time you shop.

What is Buy Now, Pay Later (BNPL)?

Buy Now, Pay Later (BNPL) is a payment method that allows consumers to defer payment over a certain time period. With BNPL, you can acquire a product or service immediately, then pay for it in a series of installments spread over several weeks or months. 

Often, these installments can be made interest-free. This approach offers flexibility and convenience in managing your finances while giving you immediate access to the things you need. 

Many retailers now offer BNPL options during checkout. Before you click that button, though, make sure you understand the terms, fees, and payment schedules, as these can change from vendor to vendor.

How does Buy Now, Pay Later work?

The Buy Now, Pay Later (BNPL) process is fairly simple. Instead of paying the total cost upfront at checkout, you’ll enter your information into the retailer’s BNPL platform. 

Then, the platform will split your total payment into equal weekly, bi-weekly, or monthly payments, depending on the provider. You’ll pay the first installment when you make the purchase and the remaining installments over a predetermined time period. Some BNPL services may also offer extended plans for larger purchases. 

To use BNPL, you’ll typically need to sign up with a BNPL provider or partner at the point of sale. You may also need to create an account linked to your payment details. Approval is often quick and doesn’t require extensive credit checks, making it accessible to a wide range of shoppers. 

Few BNPL platforms charge interest. However, if you miss a payment, you could incur late fees and take a hit to your credit score. Whenever you choose to use BNPL, staying on top of your payments is absolutely critical.

The pros and cons of Buy Now, Pay Later 

BNPL has recently gained traction as a convenient payment option, but it’s not without its drawbacks. Here are the key pros and cons of Buy Now, Pay Later. 

Pros of BNPL

Convenient and Flexible

The biggest advantage of BNPL is its convenience and flexibility. Customers can purchase products they want without worrying about upfront payment or high interest rates. With the option to pay in installments over time, Buy Now, Pay Later plans can make pricey purchases more manageable for people on a tight budget.

No Interest or Hidden Fees

Another benefit of Buy Now, Pay Later loans is that they often come with 0% interest rates or hidden fees (though this varies based on provider). This makes it easier for shoppers to budget their expenses, knowing the exact amount they’ll pay without any extra charges.

Boosts sales for merchants 

BNPL can also benefit merchants and businesses. Offering this payment option enables merchants to potentially boost sales and increase their customer base. Customers who may not have been able to make an upfront payment can now pay for the product in manageable installments.

Cons of BNPL

Risk of overspending

One of the biggest issues with BNPL is the risk of overspending. When you’re not paying for your purchases upfront, there’s a possibility of losing track of expenses and exceeding your budget. This could add stress and difficulty to your financial situation. 

Potential for debt

The convenience of BNPL can be misleading and may lead to an accumulation of debt if you’re not careful. Failure to pay required installment payments on time could lead to late fees and penalties, and ultimately hurt your credit score.

Approval criteria varies

Though you may be eligible even if you have bad credit, the BNPL provider could perform a soft credit check and choose not to allow you this payment option if you don’t meet their criteria. This is entirely dependent on the provider, so you may qualify in some cases but not in others. 

Some BNPL companies charge high interest rates and fees

The popular “pay-in-four” model, which splits your purchase into four equal payments, doesn't usually charge interest or late fees. This is not always true of long-term BNPL plans. So it’s important to make sure you’re clear on your provider’s terms and conditions so you’re not stuck with a nasty surprise bill later. 

Lack of consumer protections 

BNPL lenders often fall under different regulatory frameworks than credit card or loan providers. As a result, consumers may be less protected with some BNPL providers than others. A recent Consumer Financial Protection Bureau study on BNPL also warns that BNPL users may have limited recourse in case of disputes or fraud.

Complicated returns 

If you’ve made partial payments for an item through BNPL and wish to return it, the process isn’t always straightforward. Some merchants or BNPL services may issue refunds directly to your original payment method, whether that’s your bank account or credit card. Others might credit the refunded amount back to your BNPL account, potentially adjusting the subsequent installment payments or reducing the remaining balance owed. 

Does Buy Now, Pay Later affect your credit score?

BNPL services typically don’t conduct hard credit checks when you sign up or make purchases. Instead, they often rely on soft credit checks, which don’t affect your credit. 

However, some BPNL providers may choose to perform hard credit inquiries in specific cases, like granting higher credit limits or when switching you to a different payment plan. These hard inquiries could temporarily drop your credit score. 

In addition, most BNPL services will report late payments or defaults to credit bureaus. This negative reporting will show up on your credit report and could negatively affect your score. Conversely, timely payments might positively impact your credit score if the BNPL provider reports to credit bureaus. 

Be sure to review the terms and conditions of the BNPL service you use to understand if and how they report payment behavior to credit bureaus. This can help you gauge how BNPL usage might affect your credit score. 

Should you use Buy Now, Pay Later?

To use BNPL responsibly, you’ll need a firm understanding of your current financial situation and a clear repayment strategy. Here are some things to consider.

  • Nonessential purchases: BNPL generally isn’t recommended for nonessential purchases. It’s usually wiser to budget carefully, save your money, and purchase the product when you can afford to pay for it upfront. 

  • Essential purchases: BNPL can be helpful for essential purchases, like groceries, as long as you’re confident in your ability to make timely payments. With low interest rates, they can be a low-risk alternative to credit cards.

  • Interest and fees: BNPL services don’t often charge interest if payments are made on time. But delayed payments could leave you with fees or interest charges, impacting your overall expenses.

  • Credit score: BNPL can affect your credit score if you miss payments or default. If you’re concerned about credit impacts, consider alternative payment strategies. 

Buy Now, Pay Later Apps

Several apps offer Buy Now, Pay Later services, allowing users to make purchases and split payments into manageable installments. Some of the popular BNPL apps include:

  • Afterpay: Afterpay partners with stores like Old Navy and Gap, and provides shoppers with interest-free pay-in-four plans. It also offers six- and 12-month plans with an APR range of 0% to 35.99%. Afterpay charges no fees if payments are on time, but may charge up to $8 for payments made at least 10 days late.

  • Affirm: This app can be used for online purchases from retailers like Amazon and Walmart. Affirm offers flexible payment plans with transparent interest rates and terms. It also offers a zero-interest pay-in-four plan. Monthly plans (of up to 60 months) can charge 0% to 36% APR. However, there are no late fees. 

  • Apple Pay Later: Pay Later can be used for purchases up to $1,000 online or in-app with zero interest or fees for the pay-in-four plan. You can connect this platform to a debit card and manage it via the Apple Wallet app.

  • Klarna: Available at both Sephora and Macy’s, Klarna provides a convenient interest-free pay-in-four plan. However, late payments beyond 10 days may result in a fee of up to $7. APR can range from 0% to 29.99%. 

  • Paypal: The pay-in-four option is interest-free, while the six, 12, and 24-month plans carry an APR ranging from 9.99% to 29.99%. There are no late fees applied. 

  • Sezzle: This app is compatible with multiple retailers, including Target. Their pay-in-four plan comes with zero interest and doesn’t entail late fees. However, failing to make a payment deactivates the account after 48 hours, necessitating a $10 reactivation fee. 

  • Zip: This app is accepted wherever Visa is. Zip charges a per-installment fee (typically $1) for pay-in-four plans. It also charges state-dependent late fees ($5, $7, or $10) for missed payments. 

Alternatives to BNPL

If you’re struggling to make a purchase, BNPL is not your only financing option. Each of the following alternatives offer distinct advantages based on your financial needs.

Credit cards

Credit cards1 can be beneficial for everyday purchases, emergencies, or larger expenses due to their widespread acceptance and convenience. They might be preferable over BNPL when you need a more extended repayment period, want to build credit history, or enjoy perks like cashback, rewards, or travel benefits2

Personal loans

Personal loans3 are ideal for significant expenses like home renovations, medical bills, or debt consolidation. Personal loans are a type of installment loan. They can provide you with a substantial, fixed amount of money and a structured, long-term repayment plan. 

Secured loans

A secured loan is a type of personal loan that’s backed by collateral like property or assets. Secured loans are useful for larger purchases, such as real estate or major investments. They might be preferred when you require a substantial amount of funding for a specific purpose and are willing to provide collateral to secure the loan. 

Compare loans on Navient Marketplace

BNPL can be a good option to explore for short-term purchases that you can easily pay off in four to six installments. However, if you’re looking for a more substantial sum to make a big purchase, a personal loan might be the way to go. 

On Navienet Marketplace, you can use our free personal loan search tool to get swift access to cash at lower interest rates than credit cards or open lines of credit. Explore your options and find personalized loan rates by visiting our marketplace.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Navient may receive compensation when you click on links associated with this Navient Marketplace. Navient is not being compensated for any application, quotation, or the purchase of any financial products.

2 Navient has partnered with CardRatings for our credit card products. Navient and CardRatings may receive a commission from card issuers. Opinions. reviews, analyses & recommendations are Navient's alone, and have not been reviewed, endorsed or approved by any of these entities. 

3 Navient customers are invited to consider personal loan offers through our partner Fiona. Navient has not shared your information with Fiona and is not involved in the personal loan application process in any manner.  All information is submitted directly to Fiona and any personal loan offers are made directly by participants in Fiona’s lending platform, powered by Even Financial.  Even Financial, Inc. is the industry-leading embedded financial marketplace and independent subsidiary of MoneyLion Inc. (“MoneyLion”) (NYSE:ML). Checking your rate will not affect your credit score. Eligibility is not guaranteed and requires that a sufficient number of investors commit funds to your account and that you meet credit and other conditions.

Loan proceeds may not be used for postsecondary educational expenses, including refinancing federal or private student loans.

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