If you have ever shopped online you’ve probably noticed in recent years a new payment option that pops up during the check process to buy now and pay later. How this option presents itself can vary from website to website or application to application and it sometimes might be worded differently. For example, this is how it presents itself for several furniture store websites:

image showing affirm's buy now pay later option

While this payment option has been around for many years, it became more popular during the coronavirus pandemic. With billions of people stuck at home due to lock down measures the United States (and frankly the entire world) experienced an acceleration in the shift from traditional in-person shopping to online shopping. Today it is quickly becoming the norm for retailers to offer consumers the option to buy now and pay later for items. In fact, there are several companies that now provide the financing behind these short-term instant loans. It is likely that you’ve either come across this option while shopping or seen one of the many ads major retailers have promoting it. In this article we are going to dive deeper into the buy now pay later service, discussing what it is, how it works, who provides it, and how it differs from other forms of financing products available. 

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What is Buy Now Pay Later (BNPL)?

Buy now pay later is a type of installment loan provided to consumers to facilitate the purchases of goods and services. The loans are provided almost instantly, usually require little to no down payments and can also be interest-free. The way it works is instead of paying the full amount at checkout you enter into a contract to pay it back over a specified period of time. Because it is an installment loan, the amount you owe gets broken into smaller amount which you’ll repay over the loan term. These payments will be automatically 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 do not include any of these fees. You’ll mostly see BNPL payment plans when you shop online and some plans are also available in stores.

Currently, several companies including Klarna, Affirm and Afterpay offer buy now and pay later options on purchases made from select merchants. PayPal recently introduced a point-of-sale installment loan program as well. In addition, some credit card issuers, such as Chase Bank and American Express, have also set up similar financing arrangements that allow consumers to shop and defer payments to a later date. 

How Buy Now, Pay Later Works

While the goal of every buy now pay later loan is to help consumers purchase an item and defer payments to a later date, they are not all the same. Each BNPL company has its own distinct terms and conditions. However, the mechanics of these loans are similar. The below walks through how a typical buy now pay later loan works using the example from earlier.

flow diagram showing how buy now pay later works

  1. First, you shop online or in-person at retailers that have partnered with a BNPL provider.
  2. Second, you choose to buy now pay later. Depending on the retailer and the BNPL provider, the wording might be different. For example, with Affirm, as you can see in the earlier example, the wording was “buy now, pay over time”. However, the meaning is the same.
  3. Next you have to enter some information to have the BNPL check your eligibility for this payment option. Many times this will not result in a hard credit inquiry but it really depends on the BNPL provider and likely the size of the loan. So there is a possibility that as part of the eligibility process, the lender decides to check your credit score by reaching out to the credit bureaus for a copy of your credit report.
  4. If approved, which some providers will tell you in a matter of seconds, you can then select which payment terms you’d like. In the earlier example with Affirm we were presented with 3 options for payment over 3 months, 6 months and 12 months. This was for a $1,000 purchase with no down payment. In some cases a down payment might be required.

That’s pretty much it! Obviously after the fourth step comes repayment in accordance with whichever plan you selected. Also keep in mind that the overall cost of buy now and paying later can vary by a lot depending on the terms. In the earlier example, if you pay over 3 months the purchase is interest-free. But if you pay over the course of 12 months, you incur a 15% interest rate, so you are spending more to buy the item by deferring full payment for 12 months.

Is Buying Now Paying Later a Good Idea?

Before opting for the buy now pay later payment option on your next purchase, we’d recommend you consider the advantages and disadvantages associated with this option. The reality is that while a 0% APR loan sounds amazing, it is at the end of the day still a loan, and therefore an obligation that will need to be satisfied. Below we’ve detailed some of the pros and cons to consider before you decide to go with the buy now and paying later option.

  • Advantages of Buy Now Pay Later

    1. Splitting up your payments increases affordability. This is a clear advantage of buy now pay later: you get to pay for an expensive item over time in installments. So for example, even though you might not have $5,000 on hand to pay for furniture at a given moment with a buy now pay later option you can enter into an agreement to pay for the furniture over time. If it is over a 6 month period and with a 0% APR then it could be that you need to pay each month is $833.
    2. Using BNPL does not impact your credit. Unlike applying for a new credit card, with BNPL it is easier to qualify for the installment loans as the process doesn’t usually include a hard credit pull. This means that someone who has a newer credit history or doesn’t have a strong credit history and would otherwise be shut out of most of the credit markets, can access this form of credit.
    3. Highly convenient. The various BNPL providers have integrated their payment options seamlessly with their retail partners. Using BNPL is almost as convenient as paying with your credit card. As noted earlier, the decision on the loans also happens very quickly which is different from other forms of credit.
    4. Provides budgeting flexibility. Even if you do have the money on hand to buy an item outright, you can choose to buy now and pay later. This allows you to have some flexibility on your monthly budgeting and cash flow. This is especially the case if you are opting for a payment term with 0% APR.
  • Disadvantages of BNPL

    1. Terms may vary, always read the fine print. Before committing to a BNPL loan, it’s essential to completely familiarize yourself with the terms of the loan. For example, while a loan might state a 0% interest rate, this might not be the case for the entirety of the loan or if you have issues with repayment. This would put you in a position where you could incur expensive finance charges down the line. In addition, there could be very significant penalties if you skip or miss a payment.

    2. Some BNPL loans have fixed fees. Some BNPL programs add a fixed fee to your monthly payments. This is separate from an interest cost and has the effect of increasing the cost of the item over the life of the loan. Clearly this makes buying the item outright more attractive.

    3. Doesn’t help build your credit. While opting for BNPL and getting approved for a loan is a form of credit extension, the credit bureaus do not see it that way. Therefore even if you pay back your loan on schedule, it won’t help your credit. The downside however if that if you have late payments or worse, this could get reported by the provider.

    4. It is easy to overspend. The ability to buy an item without paying the full price at checkout can lead to financially unwise outcomes. Just as we would never recommend anyone buy items on credit cards if they could not afford to pay off their credit cards in a reasonable time frame, the same goes for BNPL.

Differences between a Credit Card and Buy Now Pay Later

While both credit cards and BNPL services offer consumers delayed payments after shopping, BNPL is quite different from purchasing using a credit card. The below table compares the two payment options across several characteristics: 


Two points shown in the table are worth discussing: with a credit card your main obligation is to not go over your credit limit and to make your minimum payment on time. However, doing this is not recommended as your credit card balance does not operate under simple interest, and so the stated annual percentage rate of the card gets applied to the entire balance, which over time will also include interest. As of this writing, this phenomena does not exist in BNPL products.

While BNPL offers consumers multiple benefits when shopping online, it is still a form of debt. Consumers should therefore be mindful of this before accepting it as a payment option. Further, since failure to re-pay a BNPL loan can hurt your credit score and history, you should evaluate whether or not you can make the repayments on time without affecting your other monthly recurring debts. 

Major Buy Now Pay Later Providers in 2022

According to research by Worldpay in its 2021 Global Payments Report, buy now pay later represented 2.9% of global e-commerce transaction value in 2021. In the United States it represented 3.8% of transaction volume. Clearly buy now pay later is still in the early stages of adoption though it is growing very rapidly. These are some of the major players:

  • Afterpay: offers a short-term installment plan via its app. You download the free app to purchase your item using a virtual credit card number and then make the first of four payments, and the rest spread out over six weeks. Afterpay will set a limit on how much credit they’ll extend to you so that you don’t overextend yourself. You also need to make your payments to them on time or your account will be paused. You might also get hit with late fees that can be as much as 25% of the purchase price of the item if you fall behind.
  • Klarna: offers an interest-free ‘Pay in 4″ plan that allows you to split any purchase into four installment payments. They also provide on some purchases a “Pay in 30” plan. If the retailer you’re shopping with isn’t already partnered with Klarna, you can download the Klarna app and make an online purchase through Klarna. If you miss or skip one of your four payments, you’ll be charged a late fee that can be up to $7.
  • Affirm: Affirm partners with retailers like Walmart, Adidas and Pottery Barn. Unlike other providers, interest rates vary with each retailer, meaning your repayment term and interest rate will change based on where you shop. While some of Affirm’s partner stores charge zero interest, others can charge up to 30% APR, with terms up to 12 months. Affirm so far has operated with a policy of never charging late fees.

Credit Card Buy Now Pay Later Options

Given the similarities between a credit card and buy now pay later, it is no surprise that credit card providers have now developed products that also offer this payment option. Some of the leading providers include:

  • American Express Pay It Plan It: the “Pay It Plan It” feature lets cardholders split eligible purchases of $100 or more into fixed monthly installments. This is only when the cardholder charges the purchase onto an eligible card. You can combine up to 10 purchases on your account. Each monthly installment will include a fixed monthly fee that you can review upfront before deciding if this option is right for you.
  • My Chase Plan: the My Chase Plan lets Chase Bank cardholders break up the cost of a purchase of $100 or more into equal monthly payments with no interest. A fixed monthly fee is added to each monthly payment. Payment plans range from three to 18 months, based on the purchase amount, your creditworthiness, and your account history with Chase. Chase Bank disclosed earlier this year that in 2021 625,000 of its credit card customers used the My Chase Plan buy now pay later option.

Final Thoughts on Buy Now Pay Later

Buy Now Pay Later has existed for many years and taken on many forms. At its core, it is basically just another form of credit extension. In fact, it is not that different from products retailers have offered for decades enabling customers to, for example, pay nothing for a product for 6 months after purchase. The benefits of using this option can outweigh the costs if it is used wisely. But it really comes down to the individual’s purchasing and credit behavior. If you tend to make purchases on your credit card and payoff the balance each month, then you are better off using a credit card. This is mainly because you can earn reward points and other perks while also building up your credit history. With buy now pay later loans neither of these are available at the moment.