Buy now, pay later financing has become a popular way to float purchases big and small. Platforms like Afterpay, Affirm, Klarna, Sezzle, Zebit and Zip allow you to spread the cost of a purchase over time — sometimes without interest.
Like credit cards and traditional loans, buy now, pay later (BNPL) financing offer flexibility. But beware of hidden fees and know that missing payments could hurt your credit score.
How to choose the best BNPL app
Most BNPL apps work similarly, though there are a few features to keep an eye on when making your choice.
Look for the lowest fees. Some BNPL apps charge fees on purchases and late payments, while others charge no fees at all. One with few to no fees can keep your overall costs down.
Choose low interest. In the event you do miss a payment, you’ll get charged an additional amount based on the app’s interest rate. Find an app with as low an interest rate as possible if you worry you might occasionally miss a monthly payment. Some BNPL providers even charge simple interest rather than compounding interest.
Check the repayment scheduling options. Some BNPL apps let you adjust or choose your repayment plan. This option is great if you value a little more flexibility in how you pay.
Assess your spending needs. Most BNPL apps have some type of transaction limit. If you need to split up a particularly large purchase, you’ll need to find a BNPL app that supports that purchase amount.
What is BNPL and how does it work?
BNPL is a four-part installment loan retailers and third-party intermediaries offer consumers. After making your first payment up front, the remaining three payments are equally split and automatically charged to your credit or debit card on a set interval, typically every two weeks.
BNPL plans are most often found in online stores. However, the service’s rising popularity means you can find them in select stores or use a third-party service to turn nearly any purchase into a BNPL payment.
Like most loans, a BNPL plan also comes with terms and conditions, including interest and fees.
How will BNPL affect my credit?
Signing up for a BNPL service usually doesn’t affect your credit. Most companies perform a soft credit check that won’t hurt your score. But missing or making a late payment will, whether it’s reported to credit bureaus by the platform itself or by your bank or credit card holder.
Until recently, on-time payments through a BNPL program weren’t reported to the major credit bureaus. However, as of early 2022, all three major credit bureaus have declared their intent to record consumers’ BNPL activity. That leaves the act of reporting payment activity up to each BNPL service.
Benefits of BNPL platforms
Most services offer helpful features like:
Flexible loan terms. Loan terms widely vary based on the provider and the retailer. For small-value purchases, loan terms can be as little as a few weeks to up to six months. For larger purchases, you may not have to repay your purchases in full for up to two or more years.
Varying purchasing power. Depending on the platform, you can finance as little as $35.
Convenience. You’ll typically receive approval in minutes when you apply for interest-free financing at checkout.
Automatic payments. Most platforms automatically deduct payments from your linked bank account when they’re due.
Wide acceptance. If you’re unable to secure a credit card, you could be eligible for a BNPL service instead to help make big purchases more affordable.
Ongoing credit. Unlike a loan, BNPL financing doesn’t expire once you pay off your debt. You can continue to use the service for future purchases.
BNPL drawbacks
BNPL is a useful tool when correctly used. But it does have some drawbacks to watch for.
Fees. Many BNPL platforms — including Afterpay and Klarna — charge late fees on missed payments. While most fees won’t exceed your minimum payment amount, some companies do charge higher fees. Other BNPL platforms charge interest at fairly high APRs — though this can be waived if you make payments early and often.
Possible interest. Also keep in mind making the minimum payment might not always repay the loan within the interest-free period. Make sure you’re paying enough at each installment to avoid paying interest.
Not heavily regulated. BNPL programs are incredibly new to the scene compared to credit cards and other established loan types. As such, they don’t have the same level of regulation and protections for consumers that you’d find on a credit card.
Still debt. Even if a platform states it doesn’t report to credit agencies, you’re still taking on debt. Know that a missed or late payment can affect your credit score.
How do BNPL apps make money?
Buy Now Pay Later companies make money in much the same way as credit card providers. A bulk of BNPL income is comprised of three sources.
Merchant fees. These are the same type of fees credit card providers charge merchants on credit card purchases. This ranges from 2% to 8% of the purchase amount.
Late fees. Missing a payment on an installment plan results in additional late fees paid to the BNPL company. These range from $5 to $15 on average.
Usage fees. Some BNPL apps charge a small fee for every purchase, usually around $1.
What credit score do I need for a BNPL app?
None. Most BNPL apps may perform a soft pull on your credit check as part of their review process, but a particular credit score isn’t required for most BNPL apps. Instead, BNPL companies look at a range of factors based on their own requirements, such as financial history and income. This makes BNPL plans easier to qualify for if you have poor or no credit compared to a credit card.
Compare BNPL services
For an idea of how some third-party BNPL services stack up, select up to four platforms and select Compare to see them side by side.
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BNPL alternatives
If BNPL financing doesn’t sound like the right fit for you, consider alternatives such as a personal loan or credit card.
Georgia-Rose was a publisher at Finder.com and specialised in shopping and travel. She previously worked in retail and tourism and travelled extensively on a budget.
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