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Buy now, pay later: What is it and how does it work?

What we'll cover

  • The basics of buy now, pay later 

  • Pros and cons to consider

  • Buy now, pay later alternatives

If you buy a home or a car, you don't necessarily have to pay for it in full upfront. Instead, you could use a loan, mortgage or another financing option to help you split up the cost into smaller, more manageable payments over time. Buy now, pay later (BNPL) services work similarly, though typically on a much smaller scale.

What is buy now, pay later?

Like a mini loan , buy now, pay later services allow you to purchase something immediately and pay it off in several installments over a set period of time. Instead of making a payment at checkout, the BNPL service provider covers the full amount and then you pay them back, often over several weeks. Clothing, beauty, electronics and other types of retailers are increasingly partnering with BNPL providers to offer this option.

How does buy now, pay later work?

When you go to make a purchase online or in an app, you may see the option to pay using a BNPL provider. You would need to make an account with that provider and give them information such as:

  • Name

  • Address

  • Email address

  • Date of birth

  • Social Security number

The provider will typically perform a soft credit inquiry (which won't affect your credit score). Approval usually takes minutes. After agreeing to the terms, you finish checking out.

Pros and cons of buy now, pay later

Buying now and paying later can sound enticing. You get what you want, when you want it — without having to bear the brunt of a hefty price tag up front. But understand that once you qualify for BNPL, it's up to you to make your payments on time and to make sure you can fully cover the cost of the item within the term you agree upon.

Buy now, pay later pros and cons.
Pros Cons
Can receive good or service immediately Late fees may be charged
High credit score not necessary to qualify Missed payments could hurt your credit score
Some BNPL companies do not charge interest Payments may continue even if the item is returned
Fast approval Could encourage impulse spending

Many BNPL services allow you to pay installments with zero interest or offer initial periods of 0% interest. However, be sure to read the fine print. Following the interest-free period, rates can skyrocket upward of 30%. BNPL also often comes with hefty late fees if you fall behind on a payment.

Making late payments (or failing to make them at all) could damage your credit score. Keep in mind, too, that BNPL services typically will not help you build your credit.

Another potential downside is that returning something you purchased through a BNPL can be tricky. You should get your money back, but there may be a delay until the merchant informs the BNPL lender of the refund. You might have to keep making payments in the meantime. If you don't, then the payment might be marked late or missing.

Making late payments (or failing to make them at all) could damage your credit score.

What apps let you buy now, pay later?

As BNPL becomes more popular, more providers have emerged in recent years. Companies including Affirm, Afterpay, Sezzle and Klarna offer financing on purchases at participating retailers. Two of the biggest apps with BNPL are Cash App and PayPal.

Alternatives to buy now, pay later

You may need to look for financing alternatives if BNPL isn't available for the item you want to buy or if the item exceeds the loan limit. You may want to consider these options.

0% interest credit card

Depending on your credit score, you could qualify for a 0% annual percentage rate (APR) credit card, which charges zero interest during an introductory period. Credit card companies report payments to the credit bureaus, so you have a chance to build your credit. You may also be able to find a card that offers a sign-on bonus, rewards and cash back.

Personal loan

Personal loans are offered through banks, credit unions and online lenders. You will typically pay interest on a personal loan, but you could likely get a longer repayment period than what is offered by a BNPL company.

Paying in full

If you want to avoid debt along with potential fees and interest payments, you could go the traditional saving route. You can create a spending plan to set aside money each pay period for the item you want.

Shop smart, shop safe

BNPL can be an option for financing purchases when you have immediate budget restraints. It's important to use these services responsibly and to understand what you're agreeing to when you click “check out." Always be sure to research fees, use reputable providers and remember: If you can't afford it today, there's nothing wrong with saving up for tomorrow.

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