The Ins and Outs of ‘Buy Now, Pay Later’ Services

We’ve all heard the ads, “with no money down and payments as little as $150 a month you could drive away today in a brand-new car!” The idea of financing big purchases has been around for some time. We do it with our homes, cars, furniture and more. It was only a matter of time before someone extended the idea to smaller purchases like jeans or headphones.

Now, companies such as Klarna, Quadpay and Affirm are bringing “Buy now, pay later” (BNPL) arrangements to any number of purchases, including the little things. And, in the wake of COVID-19 budget challenges, adoption of these services is accelerating, particularly among younger consumers. Affirm, for example, says its customer base grew from 3 million in November to more than 5.6 million in July as consumers micro-financed fitness, home office and kitchen supplies purchases.

While these services make it easier to get stuff you want today without breaking the bank, using them can be a double-edged sword. Here’s what you should know about BNPL services.


BNPL services let you shop and pay for items in interest-free installments. Oftentimes, these services are presented as a payment option at checkout online. You simply sign-up when you want to buy, choose a payment plan — usually in installments over 12 weeks or less — and you get approved on the spot after a soft credit check. You complete the transaction, and your items get shipped. So long as you make all your payments on time, you can avoid interest and fees. 


Credit Without Credit: BNPL is popular among younger consumers who may be averse to credit cards or want to avoid adding additional credit card debt. You don’t need credit history to qualify for a BNPL installment plan, and if you pay your bill on time you won’t accrue interest or charges.

It’s Easier Than a Credit Card: To get a credit card you need to apply and get approved. Depending on your credit risk, you may have to pay a higher amount of interest on balances or be approved for a lower amount of credit. There’s no application with a BNPL service as you’re approved instantly.

Helps Manage Expenses: Like credit cards, BNPL services make it easier to space out expenses and mange cash flow from month to month.

Can Help Dig Out of Credit Debt: Carrying high balances can drag down a credit score. BNPL services can finance purchases without adding balances to your credit cards. You can shift some spending to BNPL, while chipping away at credit card debt, for example.

An Edge for Online Retailers: It’s estimated that more than 70 percent of online shopping carts are simply abandoned, or customers clicking out of a site without paying. BNPL providers say their services reduce the churn rate by making it more palatable for customers to make a purchase. More checkouts means more sales. 


Overlooking the Fine Print: It’s easy to sign up … perhaps a little too easy. According to The Ascent, only 22 percent of people who have used one of these services completely understands the terms and conditions. And, as you’ll see, that could lead to costly mistakes down the road.

About Those Costly Mistakes: While it may help avoid some pitfalls of credit card debt, the penalties for missing an installment payment with a BNPL provider, in many cases, are steeper than a credit card. Some services charge a percentage of the original purchase, while others simply charge a flat rate. PayPal, for example, may charge up to a $38 fee for a missed payment. Affirm charges up to 30 percent in interest. Klarna may even block you from using the site and app in the future if you fail to make payments.

The Buy Button Beckons: The appeal of getting something you want without paying full price today is certainly, well, appealing. Of course, that’s the same reason retailers love these services. The ease of acquisition makes it much easier to indulge in impulse buys you may not otherwise be able to afford.  

Not Building Credit: While younger consumers may eschew credit cards for BNPL services, most of these services won’t help you build credit, even if you reliably make your payments on time. A solid base of credit is crucial for making big purchases like a car or home more affordable, and that is far more difficult to do if you don’t have credit. Credit cards are still one of the best ways to build your credit history.

But They Can Hurt Your Credit: While you generally won’t build credit for making on-time payments, your credit score will get dinged for late payments (which are weighted heavily in the calculation of credit scores), especially if the balance is turned over to a collection agency.


Ultimately, don’t let your judgment be clouded by the convenience and ease of BNPL, at the end of the day, this is still a loan. And, like all debts, they can be harmful to your financial health if they aren’t used wisely. And, if you tend to overspend and have a lot of credit card debt, BNPL can encourage even more risky spending.

On the flip side, when used responsibly, BNPL services can be a great way to spread out your spending and make it easier to purchase things that you want or need.

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