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How Does Buy Now Pay Later Work?

Let’s say that you want to purchase an anniversary gift, but the item you’re looking at costs over $400, and that’s out of your budget. The good news is that you can Buy Now Pay Later Jewelry, iPhones, and clothes!

Add to Cart and Get Started

When checking out, you can opt for alternative payment methods (if available and supported by the merchant). BN/PL options, such as Affirm or PayPal, may appear as an option to pay in installments, rather than paying the entire item upfront. You’ll click on the provider link and fill out a quick prequalification form, which often includes a soft credit check that doesn’t impact your score. If you meet the criteria, you’ll be approved to check out with that provider!

You may have to pay a processing fee to the merchant for using this payment method, as well as the first installment payment upfront, which is a quarter of the total price, unless you are paying monthly instead of bi-weekly.

Complete Your Payment Obligations

After you’ve paid the first installment and completed the checkout portion of your purchase, the next step is to receive your item and repay the loan in installments over time. If you decide to pay in installments that are bi-weekly, you’ll split the cost of the purchase into four installments until the balance is fully paid. Some BN/PL providers like Affirm and PayPal offer monthly installments, which may add to the total cost of interest you’ll pay over the life of the loan.

Does Buy Now Pay Later Affect Credit Score?

It depends. Some Buy Now, Pay Later apps will report on-time payment behaviors to the credit bureaus, which can positively impact your score. For example, Affirm will report consistent payments that are made on time, which can boost your credit score, even if you have a limited credit history with few credit accounts. But providers can also report negative behavior, like missed payments and accounts that are not in good standing, which will likely negatively impact your credit score. Additionally, if your account is not paid and goes into collections, your score can also be adversely impacted by a BN/PL payment plan. It’s important to stay on top of your payments!

How Do Buy Now Pay Later Apps Make Money?

Buy Now, Pay Later (BNPL) providers generate revenue primarily through merchant fees, which typically range from 2% to up to 8% of the transaction value. These fees are charged because BNPL services lead to higher sales conversion rates and increased average order values for merchants, so it’s a mutually beneficial relationship. Additional revenue streams include consumer-paid late fees and interest earned from longer-term installment financing plans, such as monthly plans.

How Do You Qualify for Buy Now, Pay Later Plans?

You won’t be able to find plans for Buy Now, Pay Later with guaranteed approval because the providers tend to review your credit, along with your income and your age. Take a closer look at some of the primary requirements for many BN/PL providers:

• Age and Identity: Users must be at least 18 years old and provide a Social Security Number (in many cases).
• Payment Method: Since you’ll typically need to pay them the first installment upfront, a valid debit card is required, and it will be linked to future payments.
• Credit Check: In many cases, providers will run a soft credit inquiry to review your financial history. This does not impact your credit score, though some providers may use a “hard” pull for larger financing plans.
• Income and Overall Financial Health: When applying for a finance plan with a provider, they will review your monthly or annual income to ensure you can afford the payments.
• Purchase Amount: You may not be approved for the entire amount that you want to finance, as some services have minimum/maximum limits. For example, most providers won’t offer installment plans under $30, and some providers won’t extend credit over $10,000. Depending on your income and the size of the purchase amount, you may not qualify for a purchase because the provider doesn’t believe you fit the criteria.

Tip: If you have an existing account and you want to apply for another short-term financing option, you should keep it in good standing. That means making payments on time and not exceeding your available purchasing power.

What are the Risks of Buy Now, Pay Later Apps?

While Buy Now, Pay Later (BNPL) apps offer appealing flexibility and convenience for consumers, they are not without risks that users should be aware of before committing to a plan. The most critical risk is the potential for accumulating unmanageable debt and spending beyond your means. Since payments are often split into small, manageable installments, it can be easy to lose track of the total amount owed across multiple BNPL plans, especially if you are applying for plans with different providers. This can result in users spreading their budget too thin, making it difficult to meet all payment obligations, including existing bills and necessary expenses.

As mentioned above, if a user misses a payment deadline, their credit score could be affected, and most BNPL providers charge late fees. These potential fees can quickly erode any perceived benefit of the interest-free structure if it were available.

Dealing with product returns or seeking a refund can become complicated when a third-party BNPL provider is involved. The refund process depends on communication and coordination between the retailer and the BNPL service, which can cause significant delays. Consumers may be required to continue making installment payments even after they have returned an item until the refund is officially processed by the BNPL provider.

How Does PayPal Credit Buy Now Pay Later Work?

PayPal Credit offers a distinct and well-established “Buy Now, Pay Later” financing option that PayPal also differs slightly from newer installment payment apps because it also offers a reusable credit line. Unlike single-use installment loans offered by companies like Affirm or Klarna, PayPal Credit provides an approved credit limit that users can utilize repeatedly. It is essentially a revolving credit account managed by PayPal. PayPal Credit has a “Special Financing” offer. For purchases of a certain amount (typically $99 or more), users can choose to defer interest for six months. This means if the user pays the entire purchase balance in full within that six-month promotional period, no interest is charged. Even during the special financing period, users are required to make minimum monthly payments. These minimum payments may not be sufficient to pay off the entire balance by the end of the six months, meaning users must budget and pay more than the minimum to avoid the retroactive interest charges.

In addition to the PayPal Credit line, PayPal has also introduced “Pay in 4,” which is a structure more similar to the contemporary BNPL model, offering four interest-free payments on smaller purchases.

What Stores Allow Pay Later?

The availability of Buy Now, Pay Later (BNPL) services is vast and continually expanding, covering nearly every retail category from fashion and electronics to home goods and travel. The specific stores that accept a “Pay Later” option depend on the BNPL provider they have partnered with:

• Affirm: Has significant partnerships with major retailers like Walmart, Target, Peloton, and Amazon, often offering options for larger purchases.
• Afterpay: Highly popular in the fashion, beauty, and apparel sectors, partnering with thousands of brands like Forever 21, Urban Outfitters, and smaller boutiques.
• Klarna: Offers four different payment options, including an installment plan. Klarna has a wide network, covering electronics (e.g., Samsung), major department stores, and even travel providers.
• PayPal Credit/Pay in 4: Since PayPal is accepted at millions of online stores globally, the reach of PayPal’s BNPL options is almost universal wherever PayPal is a payment method.

Initially, most BNPL services were primarily focused on e-commerce. However, many providers, like Afterpay and Klarna, have developed apps and virtual card technology to allow consumers to use their BNPL services in physical retail stores as well, significantly expanding their reach. The most common way the BNPL option appears directly on the retailer’s checkout page is as a payment method logo (e.g., “Pay with Afterpay” or “Pay with Affirm”).

One of the perks of using Affirm is that you can get a virtual card to use at many online stores, even if they don’t offer BN/PL on their platform! You can use this card in stores as well if you opt to get a physical one and the merchant offers BN/PL with Affirm. Simply enter the purchase price estimate, apply for the card, and swipe in the store or fill out the card details online when you’re ready to make a purchase.