When you’re about to make a big purchase, you may have received an offer at checkout to pay in installments. This is what’s known as a “buy now, pay later” offer (BNPL) and it’s a growing trend among retailers to offer these instant approval point-of-sale loans. As the payment option grows in popularity alongside the boom of online shopping, it’s important to know exactly how BNPL works, including its benefits and some of the common BNPL companies.

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What Is Buy Now, Pay Later?

“Buy now, pay later” is the ability to pay installments on a purchase you’re about to make, usually online. Typically, an outside company is the one extending the offer. Say you’re going to buy the Peloton bike you hope you use more than once a month. If you opt to pay for it in installments, you’re financing your purchase through a third-party company called Affirm and not Peloton itself.

Even credit card companies have gotten on board, offering cardholders an opportunity to make installment payments for a set fee instead of accruing revolving interest charges.

These arrangements can be advantageous to both sellers and buyers. The ability to make multiple payments over time can make a purchase seem more appealing to shoppers and result in more sales for the vendors. But using a BNPL offer may not always be a wise move, especially if it encourages spending more than you can afford.


How Buy Now, Pay Later Works

Using a buy now, pay later (BNPL) option to spread out payments on a big buy resembles a personal loan, in that your payments are split into equal installments over a period of time. These loans are often interest-free as long you make your payments on time and in full. This differs from a traditional credit card purchase, which charges you interest for every month you carry a balance, unless you’re approved for a card with an introductory 0% APR offer on purchases.

Advantages of BNPL

  • Ability to split up your payments. This might make an expensive item more attainable since you don’t have to pony up a lump sum or pay interest.
  • There’s no hard credit pull. Unlike applying for a new credit card, BNPLs are easier to qualify for and do not require a hard inquiry. This means that someone who is new to credit or doesn’t have a strong credit profile might find it more appealing to make a purchase this way.
  • Simple to do. Online shoppers in particular may find the immediate gratification of buying what they want in easy-to-understand terms a preferable way to shop.
  • Can help manage cash flow. A BNPL can help someone buy what they need with a payment plan that fits their budget.

Disadvantages of BNPL

There are some potential pitfalls to be aware of with this type of financing offer.

  • Terms may vary. Before committing to a BNPL loan it’s important to understand the terms of the deal. For example, the grace period on a late payment with Sezzle varies based on your state of residency. And your address determines the amount of your late payment when your loan is with the BNPL company Zip.
  • Some come with fixed fees. These types of programs add a fixed fee to your monthly payments, which can cost you extra over the life of the loan vs. buying the item outright.
  • May encourage overspending. The ability to pay off an item over time can make a purchase seem more affordable.
  • You may still face bank fees. By signing on for multiple additional payments, it’s easy to lose track of when payments are due. If your automatic withdrawal falls on a day when your bank account is low, you may face insufficient funds fees from your bank.

Types of BNPL Loans

Generally, there are two types of BNPL loans:

  • No-interest loans. With these types of loans, the merchant pays a fee to the third-party lending company rather than the consumer paying interest on the loan.
  • Loans with interest. These on-the-spot loans enable the consumer to make the purchase in the moment, but charge similar interest to a credit card, plus they may involve additional fees.

Typically both types of loans extend credit for a set time period. For example, if the item you’re interested in offers you a no-interest, four-part installment plan on a $1,000 purchase, you’ll typically make four equal payments of $250 every two weeks following the initial payment. If you don’t make the payments in full each month, you may be subject to penalties and other charges. And, if the BNPL came with a 0% interest offer and you’re late or skip a payment, you may be subject to deferred interest charges, which will retroactively apply to the entire balance.

Differences Between Third-Party and Credit Card BNPL Offers

The versions of BNPL offered by credit card companies differ slightly from third-party point-of-sale financing. For one thing, they aren’t offered before you’re making the purchase. But they will appear as an option on qualifying purchases on your statement. And, these plans do carry a monthly payment fee, added into your installment plan.

Some may find these offers even more convenient than a third-party company loan since it only requires you to decide after you’ve made the purchase if you want to split up payments using a line of credit you already have. This will ensure all your payments go to the same creditor and extends the payment plan to three months instead of six weeks. And, if you use a rewards credit card to make the purchase, you’ll also earn points.


Popular BNPL Companies

Affirm

Affirm has partnered with many well-known brands ranging from Pottery Barn to Expedia and may offer customers a choice at checkout of a short-term 0% interest offer or as long as 12 months with an APR ranging from 0% to 36% based on creditworthiness. There are no late fees, prepayment fees or deferred interest charges. If the retailer you’d like to buy from doesn’t already partner with Affirm, you can get a virtual card number from Affirm to make your purchase and pay Affirm back using the payment plan you selected.

Afterpay

Afterpay offers a short-term installment plan via its app or online. To make in-store payments, you’ll need to set up a card within the app and make payments from your digital wallet. For online installment plans or store purchases, you make the first of four equal payments initially and the remainder spread out over six weeks.

Afterpay sets a limit on how much credit it will extend to you, typically around $600, which can increase overtime with responsible use. Make your payments on time, or your account will be paused and you might get hit with late fees. Fees are based on the amount financed and can be as much as 25% of the purchase price of the item.

Klarna

Klarna offers an interest-free “Pay in 4” plan that allows shoppers to split any purchase into four installment payments. It also offers on some purchases a “Pay in 30” plan and plan for paying over six to 24 months at interest rates of 7.99% to 33.99%. If the retailer you’re shopping with isn’t already partnered with Klarna, you can create a one-time use card that can be used anywhere Visa is accepted. Be aware that a service fee applies for generating a one-time card to be used at merchants that don’t participate with Karna. If you are late by more than 10 days for one of your four payments, you’ll be charged a late fee of up to $7.

PayPal Pay Later

PayPal offers two different payment plans with PayPal Pay Later, its BNPL option for customers—Pay in 4 or Pay Monthly. Pay in 4 requires four fixed payments for purchases up to $1,500 with no interest, paid every two weeks after the initial down payment.

Pay Monthly is for bigger purchases—this loan can be up to $10,000 and paid back over six, 12 or 24 payments every month. Since it’s a longer period of time for a larger amount, Pay Monthly charges interest: APR can range anywhere from 9.99% to 35.99% based on your credit, though PayPal claims rates can be as low as 4.99% from time to time. Neither plan has late fees, though missed payments for the Pay Monthly plan can negatively impact your credit score and raise your APR.

Sezzle

Sezzle also offers three payment plans. Pay in 2 with your payment split equally between two payments or Pay in 4 with four payments spread out over six weeks. Both of these options have 0% interest so long as you pay on time. Sezzle also offers a monthly payment option with rates of 5.99% to 34.99% APR and terms of three to 48 months.

You may face several unexpected fees with Sezzle. You will be charged a reschedule fee if you reschedule your payment more than once or more than twice if you are Premium or Anywhere subscriber. You will pay a convenience fee if you make your Sezzle payment with a card including a debit card. You will also incur a late fee if your payment fails and it is not corrected within the grace period. Depending on where you live, your grace period is 48 hours to 15 days.

In order for Sezzle to report to the three main credit bureaus, you will need to enroll in Sezzle Up.

Zip

Zip offers a pay-in-four installment plan, spread out over six weeks. You’ll pay 25% of the total cost of the purchase plus interest and fees upfront using your linked debit card or credit card, and the rest of the payments divided into three more installments, each due two weeks apart. Zip charges an installment fee of $0 to $7.50 per purchase. If you don’t make a payment on time, you’ll be charged a late fee of $5, $7 or $10 depending on the state you live in.


Credit Card Plans

American Express Pay It Plan It

Amex’s Pay It Plan It is actually two features. Pay It allows you to pay for select purchases from the American Express App. Plan It lets cardholders split eligible purchases of $100 or more into fixed monthly installments when you charge your purchase to 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

My Chase Plan lets Chase 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 24 months, but you’ll be given one to three plans durations to choose from.

Citi Flex Pay

Citi Flex Pay lets you take an eligible Citi credit card purchase and pay it off over a set duration with fixed payments and a fixed fee or fixed APR if you choose Citi Flex Pay at checkout. It’s part of Citi’s Flex Plan program, which also includes a Citi Flex Loan option that allows you to take out a loan against your card’s credit line. Citi Flex Pay options vary by length of financing, your APR and the amount of the purchase. This makes Citi Flex Pay more opaque than some of the other credit card programs since there’s such a wide range of availability, prices and term lengths.

U.S. Bank ExtendPay

U.S. Bank’s ExtendPay plans offers credit cardholders the opportunity to pay off a purchase of over $100 over a chosen period of time and pay no interest, only a fixed monthly fee. Plan periods can range from three, six, 12, 18 or 24 months. The additional monthly fee differs per plan and per person, but will be shown to you at checkout so that there are no surprises.

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Bottom Line

Buy now, pay later plans can be an effective way to spread out the pain of a large purchase. But before you sign on the dotted line, be sure to take a good look at the fine print and understand all the costs involved. If you can stay on top of your payments, reputable BNPL services are a great way to avoid interest. But make sure you can pay off the loan on time to avoid interest charges and late fees.


Frequently Asked Questions (FAQs)

How does buy now, pay late make money?

The BNPL model generates revenue in a few ways, but mainly through merchant fees. Similar to credit cards, BNPL providers charge merchants a cut of the revenue their services generate. Cuts are often higher than credit card merchant fees, but merchants find that using BNPL services encourages customers to spend more overall. Other revenue streams include the late fees and additional finance charges consumers pay for using BNPL services.

Which of these allows consumers to pay for purchases at a later date?

All the BNPL lenders mentioned in this article allow consumers to establish a pay-over-time installment plan. However, most lenders will require a payment upfront or will charge a consumer within the first few days—consider this a down payment on the purchase. If a consumer qualifies, Affirm offers the ability to schedule your payments and will only charge you after the first payment period. Klarna offers a “Pay in 30” option that extends your payment out by 30 days.