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Buy now, pay later (BNPL) is an old concept that’s seen a resurgence in popularity in the past few years.
In essence, BNPL is a type of installment loan that you can use to make a large purchase: The cost of your purchase is broken into multiple payments of equal amounts, with the first payment typically due upon checkout.
Roughly 60% of consumers report having used a buy now, pay later service, according to a 2021 report from C+R Research. And BNPL loan originations have grown more than 200% year-over-year since 2019, per a report from the Consumer Financial Protection Bureau.
Here’s how buy now, pay later financing works, how it affects your credit score, and its potential pitfalls:
- What is buy now, pay later?
- How does buy now, pay later work?
- Ways to build credit
- Is buy now, pay later right for you?
- Buy now, pay later alternatives
What is buy now, pay later?
Buy now, pay later financing allows you to pay for an item, receive it right away, and then pay it off over time — similar to a credit card. These services usually offer multiple payment options, and some of them don’t charge interest.
Though buy now, pay later financing may seem like a new phenomenon, it’s been around since the 19th century. Our grandparents and great-grandparents may have used BNPL, also known as point-of-sale financing, to purchase large goods, like appliances or furniture.
This type of financing grew less popular as credit cards became more common but has seen a recent comeback among online retailers — especially during the COVID-19 pandemic, when consumers weren’t visiting brick-and-mortar stores.
While BNPL is most common with online purchases, some retailers also offer this kind of financing in-store. Several mobile apps also allow you to use a BNPL kind of loan to pay for purchases, even if the retailer itself doesn’t officially offer BNPL.
Here’s a quick comparison of a few buy now, pay later apps:
| BNPL App | APR | Repayment Term Options | Fees |
|---|---|---|---|
| Affirm | 0% to 36.00% |
| None |
| Afterpay | 0% to 35.99% |
| Late fees up to $10 on orders below $40; late fees up to 25% of order value or $68 (whichever is less) for orders above $40 |
| Klarna | 0% to 29.99% |
| Late fee up to $7 |
| Sezzle | 0% |
|
|
| Splitit | 0% | Monthly installments | None |
| PayPal (Pay in 4 or Pay Monthly) | 0% to 29.99% |
| None |
| Zip | 0% | 4 interest-free biweekly payments |
|
Learn more: How to Get a Personal Loan
How is BNPL different from a layaway program?
Layaway is a program some retailers offer that allows you to pay for an item over time. The store puts the item on hold, you make a down payment, and you select your payment plan (weekly, biweekly, or monthly, depending on the retailer). Once you’ve paid the full purchase amount, you can take the item home. With layaway, you may have to pay a fee for storing the item you want, and if you fail to pay for the product in full by the end of the payment period, the retailer can return the item to store shelves.
Both layaway and BNPL allow you to pay for an item in installments rather than paying for it in full up front. The difference is that BNPL allows you to get the item right away, while layaway doesn’t. The item isn’t yours to keep until you’ve paid for it in full.
How does buy now, pay later work?
BNPL services are most common with online retailers. When you’re shopping online and get to the checkout page, you’ll typically see a box offering buy now, pay later if the retailer has this financing option. The retailer may offer BNPL financing directly or through a third party, such as Affirm, Afterpay, or Klarna.
If you opt for the BNPL payment option, you’ll be asked to fill out an application on the checkout page. You’ll need to provide certain information, like your address, date of birth, phone number, and the payment method you’ll use to pay each of the installments.
The typical BNPL repayment model allows you to pay in four installments, with each installment paid every two weeks so that you’ve completely paid off your purchase in six weeks. But the specific installment period varies depending on the BNPL provider.
In many cases, you won’t pay interest if you make your biweekly BNPL payments on time, as agreed. But some BNPL companies do charge interest, which can be high in some cases. It’s important to read the fine print to check for hidden fees and interest charges before you sign up for this type of financing.
Additionally, many BNPL services allow for longer-term financing with monthly installments. You may be able to extend the repayment over a period of six to 24 months. When you choose this financing option, you’re likely to pay interest as you would with a credit card.
Here’s an example of how buy-now, pay-later financing can work:
- You purchase a new laptop for $780 (with tax) using BNPL.
- You’ll pay $195 (¼ of $780) when you check out.
- You’ll pay a second installment of $195 two weeks later.
- The third installment of $195 will be due four weeks after your purchase.
- The fourth and final installment of $195 will be due six weeks after your initial payment.
Does buy now, pay later affect your credit score?
Most BNPL lenders don’t report your on-time payments to the credit bureaus, so using this type of financing typically won’t affect your credit one way or the other.
But if you miss one or more BNPL payments, the lender might report your late payment to the credit bureaus, which could end up on your credit report and hurt your credit score.
Can I still take advantage of buy now, pay later with a bad credit score?
In some cases, you may be able to use a BNPL service with a bad credit score. Each BNPL provider sets its own qualification requirements, so your eligibility could be at least partially based on your credit score. However, there are some providers — like Afterpay — that don’t run a credit check, meaning you could qualify even with bad credit. Instead of checking your credit, Afterpay pauses your account if you miss a payment.
Ways to build credit
If you’re considering BNPL because you’re having trouble getting approved for other types of financing, improving your credit might help you qualify for a credit card or personal loan.
Here are some tried-and-true ways to bolster your credit:
- Pay your bills on time. Payment history makes up a significant portion of your credit score, so paying all your bills on time is one of the best ways to raise your score.
- Reduce your credit utilization ratio. Your credit score is also partially based on how much available credit you have compared to how much credit you’re using. For example, if you have $5,000 in available credit and have a current debt of $2,500, your credit utilization ratio is 50%. Aim for a credit utilization of 30% or less, which you can achieve by either paying down your balances or requesting a credit limit increase.
- Get a secured credit card. This kind of credit card requires an upfront security deposit. The deposit helps reassure the lender that you won’t default on your payments. The lender will report your payments to the credit bureaus, so making your secured credit card payments on time can help you improve your credit and eventually upgrade to a traditional credit card.
- Take out a credit-builder loan. A credit-builder loan, which is specifically designed to help those with poor credit, is generally for a small amount of money and offers a short repayment period of six months to two years.
While you can’t use Credible to find a credit-builder loan, you can compare interest rates from our partners who offer loans for small amounts. The Credible partner lenders in the table below all offer personal loans for $5,000 or less.
Is buy now, pay later right for you?
The best-case scenario for making a major purchase is to pay for it in full when you’re ready to buy. Saving up for a big expense in advance means you don’t have to worry about going into debt to buy the item you want or keeping track of monthly payments.
BNPL may encourage you to take on debt unnecessarily. You might have the money to pay for your purchase in full, but when you see the BNPL option at checkout, you may use it to avoid losing that money right away. In these cases, it’s likely better to just pay for the item up front as you normally would.
But if you can’t wait to make a big purchase and don’t have the money set aside for it, BNPL could be an option. BNPL allows you to finance a purchase, often without interest, and you’ll have a clear, short-term repayment schedule. BNPL may also be the only financing option if you don’t have good credit or access to a credit card.
Like any financial product, BNPL financing has pros and cons to consider:
| BNPL Pros | BNPL Cons |
|---|---|
| Zero-interest plans available | Some plans may charge late fees |
| No minimum credit score required | Payments may not be reported to the credit bureaus, so making on-time payments won’t help you build credit |
| Offered at many retailers during checkout | Late payments may be reported to the credit bureaus, which can hurt your credit score |
| Lets you split a large purchase into smaller, more manageable payments | Easy to overspend |
Buy now, pay later alternatives
If you want to split up payments for a large purchase without using BNPL financing, here are some alternatives to consider.
Personal loans
Applying for a personal loan is one way to help you afford a larger purchase or unexpected expense. A variety of financial institutions offer these installment loans, such as banks, credit unions, and online lenders. You’ll pay interest on a personal loan, which is the cost of borrowing money (expressed as the annual percentage rate). This means you’ll pay the lender back more money than you borrowed.
Most personal loans are unsecured, which means you’ll need to have good to excellent credit to qualify for the best loan terms and lowest interest rates. Several lenders specialize in offering personal loans to borrowers with bad credit, but you’ll most likely pay a higher interest rate to borrow money.
Another plus: Many personal loan lenders report your on-time payments to the credit bureaus. So, unlike BNPL loans, making your personal loan payments on time can help you build your credit.
But unlike BNPL services, personal loans aren’t appropriate for small purchases. While BNPL services can often be used for any purchase, including those under $100, many personal loan lenders require minimum loan amounts starting at $500—$1,000.
You can use our personal loan calculator to see how much your monthly payments might be.
Credit cards
Credit cards are similar to BNPL services in many ways. With either option, you can generally finance big and small purchases and pay them off over time.
As with BNPL services, it’s possible to avoid paying interest on your purchases with a credit card. As long as you pay the balance off in full before the due date, your card issuer won’t charge any interest.
You can get a credit card from many places, such as large financial institutions and retailers that offer in-store credit cards. However, in-store credit cards have several downsides, including their high interest rates and the fact that they can only be used at a specific store.
For that reason, consider looking for a rewards credit card from a major credit card company instead. Just make sure to pay your balance off each month to avoid interest and make the card’s perks worth it.
Home equity loans
Home equity loans allow homeowners to borrow against the equity they’ve built up in their homes. These loans often come with a lower interest rate than personal loans or credit cards, and there are generally no restrictions on how you can use the money.
But home equity loans come with closing costs and fees. And since you use your home as collateral to secure the loan, the lender could foreclose on your home if you aren’t able to make your payments. For that reason, they aren’t an appropriate option for most purchases.
Emily Guy Birken has contributed to the reporting of this article.
