How does buy now, pay later (BNPL) work?

Buy now, pay later (BNPL) is a financial service that lets consumers purchase items immediately and pay for them later, typically in installments. It’s an approach to making purchases that can be ideal if you need instant access to goods with delayed payment options. This can also be helpful if you need to spend more than you can immediately afford and want to avoid negatively impacting your credit score, such as by going over the limit of a credit card.

But there are also drawbacks to be aware of. Here’s what you should know about how BNPL works as well as the benefits and risks to consider.

What is buy now, pay later?

BNPL is a type of financing that allows customers to purchase items immediately and pay for them over time. This method splits the total cost into smaller, more manageable payments, usually without interest if the full amount due is repaid within a specific time frame. 

How does buy now, pay later work?

BNPL lets you purchase items immediately and pay for the purchase over time via equal installments, such as weekly or monthly payments. You’re not required to make any upfront payment at checkout. Instead, the BNPL service provider pays the merchant the full amount due, effectively lending the purchase amount to the consumer.

The repayment timeline and specific repayment terms vary depending on the particular BNPL service provider. Some providers offer an interest-free period — usually a few weeks — during which consumers can repay the loan without incurring any additional charges. For instance, you might be able to split your purchases into four payments over six weeks or two payments over two weeks without incurring interest. However, if you fail to pay back the loan within the interest-free period, retroactive interest based on the original price as well as late fees could apply — increasing the overall cost of the purchase.

The specific interest rates and fees are typically outlined in the agreement between the consumer and the BNPL service provider. When interest is incurred, the rates generally range from 0% to 35%, depending on the provider. Some platforms also charge installment fees and late fees — typically varying from $5 to $10.

Where can you use buy now, pay later?

The number of places where buy now, pay later services can be used continues to increase, according to a study from the Consumer Financial Protection Bureau (CFPB). This type of payment was initially used in the apparel and beauty industries but has since widely expanded. While the option for BNPL is most commonly integrated into online shopping platforms and apps, it’s also available in a variety of brick-and-mortar stores.

Here are a few of the most well-known platforms and retailers that offer BNPL:

Affirm

You can use Affirm to finance purchases on various retailers at checkout or through the Affirm app. It works with brands like Walmart, Target, Priceline, TheRealReal and more, offering two different payment options — either four installment payments with 0% interest or a monthly installment plan that can include interest rates as high as 36%.

Afterpay

Afterpay is a popular BNPL service you can use at thousands of brands — both online and in-store — including Nordstrom, Alo Yoga, Skechers and Ikea. With this option, you can split your purchases into four interest-free payments, or you can opt to pay over six or 12 months. 

Klarna

Klarna is another widely used BNPL service that works with thousands of retailers, including Nike, Instacart, Sephora and Wayfair. It offers the flexibility of payments at your pace, splitting the cost into four payments that are paid every two weeks. You can also choose from the platform’s 30-day payment option or monthly financing. 

Sezzle

Sezzle is a BNPL platform that allows you to pay for purchases in four installments over six weeks with 0% interest. You can also choose to pay monthly for three to 48 months with rates between 5.99% and 34.99%. You can use Sezzle with brands like Amazon, Walmart, Instacart and Apple.

Pros and cons of buy now, pay later

Like any financial tool, BNPL services have both advantages and disadvantages. Understanding these can help you decide whether BNPL services align with your financial needs and habits. Here are some of the pros and cons to consider:

Pros

• Immediate purchase power: BNPL offers the ability to make a purchase immediately without paying the entire cost upfront. This can be beneficial if you don’t have sufficient funds at the moment of sale but expect to have them shortly.
• Flexibility in payments: BNPL services often provide flexible repayment options. You can repay the amount in fixed installments spread over a specific period, making it easier to manage finances. This flexibility is particularly beneficial for high-ticket items where paying the full amount at once can be financially daunting or even impossible.
• Potentially no interest charges: Many BNPL services don’t charge any interest if you make payments within the stipulated time frame. This is a significant advantage over traditional credit options, which usually involve interest charges.
• Boosts credit score: BNPL can help improve your credit score if used responsibly. Payment history is one of the biggest factors that make up your credit score — so BNPL could positively impact your credit if you make all of your payments on time. 
• Ease and convenience: BNPL options are often integrated into the checkout process of online retailers, making it a convenient alternative to traditional payment methods. The approval process is usually quick, and there’s no need for a lengthy application or complicated paperwork.

Cons

• Potential for overspending: BNPL services make it easy to purchase items immediately, which can lead to impulse buying and overspending. This might cause you to purchase nonessential items simply because you can delay payment, potentially leading to financial stress in the long run.
• Impact on credit score: While timely repayments can boost your credit score, the reverse is also true. If you fail to make payments on time, this can negatively impact your credit score. Some BNPL services also conduct a hard credit inquiry at the time of application, which can temporarily lower your score.
• Late fees and interest charges: Although many BNPL services don’t charge interest if you make payments within the stipulated time, missing payments can result in late fees. These costs can quickly accumulate, turning a seemingly affordable purchase into an expensive debt.
• Complex terms and conditions: The terms and conditions of BNPL services can sometimes be hard to understand. You might unknowingly agree to unfavorable terms, such as compulsory arbitration or waiver of class action rights.
• Potential for increased debt: BNPL allows you to take on multiple installment plans concurrently, which can lead to higher amounts of debt. If you’re not careful, you might find yourself with numerous debts to manage, which could lead to a cycle of debt that can be hard to break.

Alternatives to buy now, pay later

BNPL services offer a convenient and flexible way to finance purchases, but they’re not the only payment options available. Depending on your financial situation, other alternatives could be a better fit. Here are some common alternatives to BNPL:

Personal loans

Personal loans are installment loans that are paid back over a set period. They often have lower interest rates than credit cards (usually between 5% and 36%), especially for borrowers with good to excellent credit. 

Most personal loans are unsecured, meaning you don’t have to worry about collateral. Some lenders also offer secured loans that require collateral, such as a car or other property. Secured loans are less of a risk for lenders, which in turn can make them easier to qualify for. This also usually results in lower interest rates compared to unsecured loans or credit cards — however, you risk losing your property if you miss payments.

Keep in mind that like BNPL services, personal loans can lead to overspending if not used responsibly. Even if you choose a low-interest personal loan, it’s still important to consider the total cost of the loan, including origination or other fees.

Tip: Use our personal loan calculator to see how different interest rates and repayment terms can affect your overall borrowing costs.

Credit cards

Credit cards offer the flexibility of making purchases and paying them off over time. However, unlike some BNPL platforms, credit cards typically come with an annual percentage rate (APR), which can lead to significant interest if balances are not paid off each month. On the other hand, many credit cards offer benefits such as a 0% introductory APR, cash back, points or miles on purchases, which are unavailable through BNPL platforms.

Still, using credit cards responsibly is essential to avoid high-interest debt. Missing payments can result in penalties and damage to your credit score. Carrying a high balance can increase your credit utilization ratio and further hurt your credit score.

Layaway

Layaway is an old-fashioned alternative to BNPL that’s making a comeback. With layaway, you choose your item and make a deposit, then pay the rest of the price over time. Once you’ve paid in full, you can take the item home. This can be a smart option if you’re buying something expensive and need time to pay for it. It also carries less risk than BNPL because there’s no potential for taking on debt.

That said, layaway plans often come with service or cancellation fees, and you won’t receive your item until you’ve paid in full. You could also miss out on sales or lower prices after putting the item on layaway.

Saving and paying in full

Perhaps the safest alternative to BNPL is traditional saving. If you want to make a large purchase, consider setting aside a certain amount of money each month until you have enough to pay for the item in full. This method avoids debt, interest and fees, and it can help you learn valuable budgeting skills.

While saving requires patience and discipline, it can be the most cost-effective method in the long run. That said, it might not be a viable option for emergency purchases you can’t delay. 

Is buy now, pay later a good idea?

Whether BNPL is a good idea depends on your financial situation and spending habits. If you’re disciplined and confident about making timely repayments, you can use BNPL strategically as a short-term, interest-free loan to cover essential purchases or manage cash flow. 

BNPL could be a favorable option if you:

• Need to cover essential, high-cost purchases: BNPL can be a good solution if you need to purchase a necessary but expensive item like a household appliance and the necessary funds aren’t readily available. 
• Prefer a fast, interest-free option: BNPL is a quick and easy financing solution that can be helpful in emergencies without the need for extensive paperwork or approval wait times. Plus, you might be able to avoid paying interest, which can be easier on your budget.
• Want to boost your credit score: If you want to improve your credit score, making timely repayments on a BNPL loan can showcase financial responsibility. Just ensure the BNPL platform reports the on-time payments to the credit bureaus as many don’t.

On the other hand, BNPL might not be ideal if you:

• Have a problem with impulse buying: BNPL’s accessibility as well as the allure of immediate gratification can make it tempting to spend beyond what you can realistically afford. This could put you at risk of falling into a debt trap and lead to financial stress.
• Lack a stable source of income: If you don’t have the income to make your payments on a BNPL loan, you could end up owing excessive interest and late fees. This could also damage your credit and make it harder to qualify for other types of financing in the future.