All you need to know about buy now, pay later

If you’ve bought a home or a car, maybe even a couch or an exercise bike, chances are you didn’t pay for it in full upfront. Instead, you used 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 services work similarly, though typically on a much smaller scale.

As you shop online or through a retailer’s mobile app, you may come across the option to check out using a point-of-sale financing provider (aka, a buy now, pay later service).

Like a mini  loan , buy now, pay later (BNPL) services allow you to break down a purchase into several smaller installments, typically paid over a period of six weeks. Clothing, beauty, and additional types of retailers are increasingly partnering with BNPL providers to offer lending options that can make smaller purchases more manageable and convenient.

You might consider using a BNPL service for a spur-of-the-moment retail purchase, like an air fryer, or a buy that you’ve been thinking about but haven’t been able to save up for, like a comforter.

When you check out using BNPL, you may have to make an account. They may also require your Social Security number and will often perform a soft credit inquiry (which won’t affect  your credit score) – although some services do perform hard credit inquiries, which could reflect on your credit report. Nonetheless, you’ll likely find out on the spot whether you’re approved. If so, you can then choose your payment plan and finish checking out.

While you work directly with the BNPL service through its own platform, a financial institution works with the service on the backend. A typical BNPL service might offer four equal, interest free payments — the first paid at checkout and the following three paid every two weeks. So, if you bought a $100 pair of sneakers, you’d pay $25 at the time of the purchase and another $25 biweekly for the next six weeks. If you want, you may be able to log in to your account with the provider and pay the remaining balance sooner than the scheduled payment dates.

Various BNPL platforms offer different payment plans and terms. Many have price limits (capping purchases at $1,500, for example) and some charge fees or interest, so it’s always smart to read through all the terms to understand exactly how the process will work. Keep in mind, even if a service doesn’t charge interest, it will likely have penalties for late payments.

BNPL services can help you purchase items you want or need even when you don’t have the ability to pay in full upfront. Installments are intended to complement your  budget . They’re convenient, quick to set up, and can help you manage your cash flow month-to-month. You might consider using a BNPL service, if:

1. You’re making an urgent, one-time purchase

Perhaps you need a new suit for a big work meeting, you’re replacing dysfunctional headphones with a wireless pair, or your aching back means it’s time to upgrade your office chair. Taking out a personal loan for a few hundred dollars doesn’t make sense, and you might not have time to save up the money you need upfront. Instead of spending a couple hundred dollars in one click or potentially adding to your credit card balance, splitting the payments up could be more manageable for your budget. As long as you know you can pay each installment in full and on time, the ease of a BNPL payment plan could be your preferable financing method in this situation.

2. You don’t have a credit card or are new to credit

BNPL is most popular with younger generations such as Millennials and Gen Z — and not just because of its digital aspect. Some BNPL services don’t require a credit history or top-notch credit score to qualify (unlike a credit card or traditional loan). If you don’t have a credit card, don’t want to add to your credit card balance, or have a low credit score that might result in high interest rates, BNPL may be a useful option.

3. You could save on interest

One perk of some (but not all) BNPL services is they offer 0% interest financing. If you’re trying to decide between paying for an item with a credit card or BNPL service, consider whether the latter will help you avoid interest costs (as well as additional credit card fees).

Let’s face it, buying now and paying later sounds like a pretty sweet deal. You get what you want, when you want it — without having to bear the brunt of a hefty price tag up front. But that doesn’t mean you’ll save money in the long run. And it can be easy to get lured in by enticingly low payments. That’s why it’s important to look out for signs of predatory lending. Practices like absurdly high interest rates or massive late payment fees that are often disguised by claims that are too good to be true — taking advantage of borrowers for the benefit of the lender.

BNPL services aren’t inherently predatory, but you should always aim to have a thorough understanding of how they work before you check out. To use BNPL responsibly, keep these considerations in mind:

1. BNPL is not meant to replace long-term loans

Buy now, pay later services are meant to help you pay for items that may not fit in your day-to-day spending, but aren’t large enough to require a loan. For those purchases greater than $500, you might want to explore options like longer-term installment financing, provided through services like  Sezzle , which makes financing available by  Ally Lending  for purchases up to $40,000.

2. Understand potential fees and interest

Many BNPL services allow you to pay installments with zero interest or offer initial periods of 0% interest. However, you should always read the fine print. Following the interest-free period, rates can skyrocket up to 30%. BNPL also often comes with hefty late fees if you’re behind on a payment. And if you default on your payments, they may charge the full amount to your linked card.

3. BNPL is not a substitute for credit

You don’t need great credit to qualify for BNPL, but making late payments (or failing to make them at all) can still do serious damage to your credit score. Understand that once you qualify for BNPL it’s up to you to make your payments on-time. Keep in mind, too, that BNPL services typically will not help you build your credit (although lending options like a traditional loan or a credit card will) — which can be a necessity if you plan to take out a  mortgage  or receive auto financing someday.

Buy now, pay later can be an extremely useful option for financing purchases when you have immediate budget restraints or need more control over your cashflow. But, it’s essential to use these services responsibly and to understand what you’re agreeing to when you click “check out”. Always be sure to research fees and APR, work only with reputable providers, and remember: If you can’t afford it today, there’s nothing wrong with saving up for tomorrow.