(TL;DR) Buy Now Pay Later services like Affirm, Afterpay, Klarna, Zip, and Sezzle let you pay in installments with no interest. They can be helpful if you want to pay for a medium-size purchase over time without putting the full price tag on your credit card. But relying on BNPL plans can be risky.
What is Buy Now Pay Later (BNPL)?
Buy now pay later (BNPL) is a form of credit offered at checkout that lets you pay for that item in (usually) four installments over six weeks — you pay 0% interest and (usually) 25% of the principal upfront as a down payment. You’ll also pay late fees if you miss payments. It’s like a revolving line of credit, but it’s not a credit card.
Popular BNPL companies include Affirm, Afterpay, Klarna, Zip, and Sezzle. They’ll often give you a spending limit that can change over time depending on your repayment activity.
It’s a modern twist on the practice of “layaway” that started in the Great Depression and slid out of fashion in the 1980s. With BNPL, you can get your stuff right away. Becoming trendy in the mid-2010s, BNPL was created to give shoppers short-term credit for moderately priced online retail purchases — from hats to perfume to mattresses. It was built for consumers who need the flexibility of paying over time, don’t want to add to their credit card balances, and who like simple repayment terms and no-interest payments.
BNPL purchases usually range from $50 to $1,000, with the average loan amount rising in recent years: $135 in 2021 compared to $121 in 2020.
Who can use BNPL?
With their credit card balances on the rise, it makes sense that Gen Z and millennials are the primary users of BNPL — 68.6% of BNPL borrowers were between the ages of 18 and 40 in 2021. In recent years, a surprising number of Gen Xers and boomers have also been getting on the “pay-in-four” bandwagon. It’s hard to resist 0% interest vs. the average 16.27% interest rate on credit cards, no matter what age you are. Plus, only having to put 25% down? We get it.
BNPL loans tend to be easier to get approved for than traditional credit cards. However, there are minimum age limits for BNPL plans. When you agree to Buy-Now-Pay-Later your purchase, only a soft pull of your credit report is taken. So it doesn’t ding your score, and the pull is only to verify your identity and to assess your financial behavior and creditworthiness. (People whose identities and creditworthiness can’t be confirmed might find themselves unable to get BNPL credit.)
Approvals are also on the rise: in 2020, 69% of applicants were approved for BNPL credit, versus 73% of applicants in 2021. Meanwhile, regular credit cards have an across-the-board approval rate of around 40%. A big difference! The BNPL industry itself is also growing explosively. Between 2019 and 2021, the number of BNPL loans provided by Affirm, Afterpay, Klarna, PayPal, and Zip (fka Quadpay) grew by 970%, from 16.8 million loans to 180 million loans. Meanwhile, the dollar amount of these loans grew by a whopping 1,092%, from $2 billion to $24.2 billion.
When should I avoid BNPL?
If you have a very low credit score, are inexperienced with managing debt, and/or carry a credit card debt balance from month to month, you could be harmed by BNPL plans.
Remember what we said earlier about BNPL companies not doing hard pulls of your credit report? That means they won’t know how much debt you’re carrying, and might allow you to take out BNPL loans you aren’t equipped to pay back on time. When you’re late on a payment, you’re charged a penalty — making that original purchase more expensive than you bargained for.
This makes it only harder to get out of a cycle of debt. Consumers in the 18 to 39 demographic are statistically most at risk right now, with their credit card delinquency rising between Q3 of 2021 and Q1 2022.
BNPL usage historically doesn’t affect your credit score, but that’s about to change. In 2022, the major credit bureaus announced they would be reporting BNPL loans on consumer credit reports. Meaning on-time BNPL payments could boost your credit score, while late and non-payment could tank it.
Also, if you signed up to auto-pay your BNPL installments, those automatic payments can take a bite out of your cash balance when you aren't expecting it — leading to overdraft fees and negative balances. Like a ghost of impulse purchases past, multiple BNPL buys can haunt your financial life for months if you’re not careful.
What are the biggest differences between credit cards and BNPL?
Should you use the credit card in your wallet or the BNPL offer at checkout? Here’s how credit cards and BNPL are different.
Credit card vs BNPL
CC: Revolving credit offered by a bank. Loan size is limited (aka your credit limit) and what you buy is subject to interest, or APR, added to any unpaid balance after a month.
BNPL: A loan you can take out at checkout (aka point of sale, or POS) that lets you pay for your item in equal installments. You pay the first installment right away. There’s no interest on this loan.
Uses
CC: Use it anywhere that accepts credit cards. Buy a pack of gum at a newsstand — or completely redecorate your house.
BNPL: Only at participating retailers. But it’s a long list: Amazon, Old Navy, Nike, Etsy, Sephora, Walmart, and many more.
Credit score impact
CC: Applying for a credit card triggers a “hard pull” of your credit report, which can lower your credit score 5–10 points. Your debt and late and on-time payments affect your credit report.
BNPL: Applying usually only requires a “soft pull,” so no credit score ding. Recently, credit bureaus announced plans to include BNPL debt and payment history on your credit report.
Available credit
CC: Clearly stated on your monthly statement
BNPL: Unclear. Credit limits don't always match what customers can actually spend.
Fees
CC: Interest (see above) and penalties for late payments or paying less than the minimum payment.
BNPL: No interest, but fees for late payments.
Benefits
CC: Cash back, points, miles with certain cards
BNPL: 0% interest and the flexibility to pay over installments
Disputes/fraud
CC: Protections are robust; under the Fair Credit Billing Act, you’re not liable for unauthorized charges and you don’t have to pay a charge you’re disputing.
BNPL: The Act doesn’t apply to “installment loans.” Dispute investigations usually take longer than the six-week installment plan, and you’re on the hook to pay in the meantime. And fraudulent “takeovers” are on the rise.
Conclusion
Buy Now Pay Later (BNPL) plans are a good way to get a little extra time to pay off a purchase — usually over six weeks in four installments, with 0% interest., but late fees are a distinct possibility. Compare that to paying with a credit card, which charges interest on any unpaid money after a month, and you can see why they’ve become popular. But BNPL credit comes with unique risks, like getting approved for a loan you’ll struggle to pay back, and possibly even being unable to successfully dispute purchases. You might also miss out on the points, miles, and cash back offered by many credit cards.
