Buy Now, Pay Later (BNPL): How It Works And What To Look Out For

Whether you’re eyeing an expensive sofa or a new TV, you may be tempted to take advantage of “buy now, pay later” (BNPL) options. These services allow you to split the cost of your purchase into several fixed payments, but you should understand the costs and risks before using BNPL.

We’ll cover how BNPL apps and BNPL services work, when to use them, and some alternatives, so you can decide if it’s the right financing option for you.

What is buy now, pay later?

While the terms vary depending on the plan you choose, buy now, pay later generally allows you to pay for your purchase interest-free over several weeks or months. Some companies also offer the option to pay for your purchase in monthly installments. These plans may or may not impact your credit, depending on whether the service provider runs a hard credit check. Some BNPL companies also charge fees for using the service or paying late.

Best BNPL services

Below are some of the most popular buy now, pay later companies and the financing options they offer.

How BNPL works

With most BNPL companies, you’ll pay for 25% of your purchase on the day of your order, and then make three equal payments every two weeks after that, to qualify for the interest-free option.

Many BNPL companies also offer monthly installment loans, with the annual percentage rate (APR) determined by your credit score. The APR represents the total cost of borrowing, including the interest rate and fees, each year. It’s expressed as a percentage of your purchase amount.

Your payments may be reported to the credit bureaus, depending on the plan. That means using BNPL can hurt your credit, but it may also allow you to build credit.

There are some drawbacks to using BNPL, even if you choose the interest-free option. You may not be able to dispute the payment to the retailer, since that’s protection you get from your credit card. Returns can be messy as well. Depending on the loan agreement, you may need to keep making payments until the return is processed.

BNPL eligibility requirements

Eligibility requirements vary by provider, but you typically have to meet certain conditions to sign up for BNPL, which may include:

• Be 18 or older
• Be a U.S. resident
• Have a Social Security number
• Have a bank account 
• Have a text-enabled phone for verification codes

Although some BNPL services don’t run a credit check, others may require a positive credit history or a minimum credit score. However, BNPL is typically easier to qualify for than other types of credit, even with bad credit or no credit history.

BNPL interest rates and fees

Interest typically applies only to longer-term BNPL purchase options. But even short-term, interest-free loans could have upfront finance charges. APRs can range from 0% to 36%. Also, repayment terms can range from six to 48 months.

It’s important to remember that interest can really add up, especially if you have a high APR combined with a short repayment term. A $3,000 purchase financed at 36% APR with a repayment term of two years would cost $1,251 in interest, or nearly half as much as the purchase itself. BNPL late fees and other charges can also increase your costs.

BNPL for online shopping

Some online shopping websites offer BNPL as an option during the checkout process. Typically, the seller lists BNPL financing options with one or more services, such as Affirm, PayPal, or Klarna. If you have an existing account with a BNPL provider, you can log in to continue. If not, you can sign up and start your application.

If you use BNPL for online shopping, be sure to read the fine print. In some cases, the estimated payment amount may not include shipping or taxes. Also, changes in shipping or taxes made by the seller after you place your order could affect the size of your BNPL payments.

BNPL vs. personal loans

Using BNPL may seem like a faster, easier way to pay for a purchase than traditional options like taking out a personal loan, especially if you don’t have good credit. However, it’s important to consider that personal loans have advantages as well as disadvantages.

• Some lenders offer personal loans for bad credit or no credit history, although borrowers with good or excellent credit typically get the lowest interest rates.
• Some lenders offer same-day funding for personal loans, but most deliver funds within a few business days.
• You can shop around, compare multiple lenders, and see prequalified interest rates and repayment terms on an online personal loan marketplace without setting foot in a branch office. (Prequalifying isn’t an offer of credit, but it does give you an idea of rates and terms you might qualify for if approved.)
• Personal loan lenders typically report payments to one or more credit bureaus, so making on-time loan payments can improve your credit score.

BNPL pros and cons

When deciding to use buy now, pay later, it’s important to consider the pros and cons.

Pros

• May offer interest-free financing: Some BNPL lenders allow you to pay over time without incurring interest. Some companies also don’t charge any fees.
• May not impact credit: Some pay-in-4 plans will not impact your credit score, but check with the lender before applying.
• Easy application: You can apply during checkout, often in just a few steps. Approval decisions are instant.
• Available at major retailers: Whether you’re buying a pair of sneakers or a new mattress, you’ll likely find BNPL options available.
• No need for a credit or debit card: If you pay through a BNPL company, you can typically make the purchase directly from your checking account.

Cons

• May encourage overspending: It’s generally not a good idea to buy something you don’t have the money for now, unless it’s a necessary expense. If you don’t budget carefully, you could end up with insufficient funds to make your payments and incur a late fee.
• Longer terms come with interest: If you need more than six weeks to pay for your purchase, you may pay interest.
• Some plans charge fees: Some plans come with credit card convenience fees, funding fees, late fees, or fees for rescheduling your payment.
• Disputing or returning your purchase may be difficult: Depending on the plan, you may have to take extra steps to return your purchase, and you may not be able to dispute the transaction if you don’t use a credit card.

Alternatives to BNPL

Here are some alternatives to consider.

Personal loan

If you need more than six weeks to pay off your purchase, you may consider taking out a personal loan instead, especially if it’s a large purchase that you need a few years to pay off. Personal loans generally come with lower rates than credit cards, and most come with longer repayment terms than BNPL loans. You can also use the money for almost any expense, not just purchases at major retailers. And you’ll build credit if you make your payments on time.

0% APR credit card

Many major credit card issuers offer a 0% introductory APR to new cardholders, which can help you avoid interest on all your purchases for as long as 21 months. Some store-branded credit cards may offer an even longer interest-free period on certain purchases. 

If you think you’ll struggle to repay the purchase in six weeks and you have good credit, a 0% APR card can be a great alternative to BNPL. Just make sure you budget to pay off your purchase before the introductory period is up and the card’s regular APR goes into effect.

Related: Personal Loan vs. 0% APR Credit Card

Disclosure: Some lending partners that participate in Credible’s comparison marketplace offer loans to borrowers with scores as low as 550. Borrowers with low scores will have fewer lending options than borrowers with higher credit scores.