When you’re about to make a big purchase, you may have received an offer at checkout to pay in installments. This is what’s known as a “Buy Now, Pay Later” offer (BNPL) and it’s a growing trend among retailers to offer these instant approval point-of-sale loans.
Typically, an outside company is the one extending the offer, so when you use your Chase Sapphire card to buy that Peloton bike, for example, if you opt to pay for it in installments, you’re financing your purchase through a third-party company called Affirm and not Peloton itself.
Credit card companies have also gotten on board, offering cardholders an opportunity to make installment payments for a set fee instead of accruing revolving interest charges.
These arrangements can be advantageous to both sellers and buyers as the ability to make multiple payments over time can make a purchase seem more appealing to shoppers and result in more sales for the vendors. But using a BNPL offer may not always be a wise move, especially if it encourages spending more than you can afford.
Here’s what you need to know about BNPL.
How Buy Now, Pay Later Works
Using a Buy Now, Pay Later (BNPL) option to spread out payments on a big buy resembles a personal loan in that your payments are split up into equal installments over time, typically just a few months. These loans are often interest-free as long you make your payments on time and in full. This differs from a traditional credit card purchase which charges you interest for every month you carry a balance, unless you’re approved for a card with an introductory 0% APR offer on purchases.
Advantages of BNPL
- Can split up your payments. This might make an expensive item more attainable since you don’t have to pony up a lump-sum.
- There’s no hard credit pull. Unlike applying for a new credit card, BNPLs are easier to qualify for. This means that someone who is new to credit or doesn’t have a strong credit profile might find it more appealing to make a purchase this way.
- Simple to do. Online shoppers in particular may find the immediate gratification of buying what they want in easy-to-understand terms a preferable way to shop.
- Can help manage cash flow. A BNPL can help someone buy what they need at a payment plan that fits their budget.
Disadvantages of BNPL
There are some potential pitfalls to be aware of with this type of financing offer.
- Terms may vary. Before committing to a BNPL loan it’s important to know the terms of the deal. For example, 0% interest may not last the length of the loan, leaving you with expensive finance charges down the line and there could be sky-high penalties if you skip or miss a payment.
- Some come with fixed fees. These types of programs add a fixed fee to your monthly payments, which can cost you extra over the life of the loan vs. just buying the item outright.
- They don’t help build credit. If you pay on time, it won’t help your credit. Late payments, however, may be reported and have a negative impact.
- May encourage overspending. The ability to pay off an item over time can make a purchase seem more affordable.
Types of BNPL Loans
Generally, there are two types of BNPL Loans:
- No-interest loans. With these types of loans, the merchant pays a fee to the third-party lending company rather than the consumer paying interest on the loan.
- Loans with interest. These on-the-spot loans enable the consumer to make the purchase in the moment, but with interest similar to a credit card.
Typically both types of loans will offer a definitive time period in which the loan must be paid back in full. So for example if the item you’re interested in offers you a no-interest four-part installment plan on a $1,000 purchase, each month for four months you’ll make equal payments of $250. If you don’t make the payments in full each month, you may be subject to penalties and other charges. And, if the BNPL came with a 0% interest offer and you’re late or skip a payment, you may be subject to deferred interest charges, which will retroactively apply to the entire balance.
Differences Between Third-Party and Credit Card BNPL Offers
The versions of BNPL offered by credit card companies differ slightly from third-party point-of-sale financing. For one thing, they aren’t offered before you’re making the purchase. But they will appear as an option on qualifying purchases on your statement. And, these plans do carry a monthly payment fee, added into your installment plan.
Some may find these offers even more convenient than a third-party company loan since it only requires you to decide after you’ve made the purchase if you want to split up payments using a line of credit you already have. And, if you use a rewards credit card to make the purchase, you’ll also earn points too.
Popular BNPL Companies
Affirm
Affirm has partnered with multiple well-known brands ranging from Pottery Barn to Expedia and may offer customers a choice at checkout of a short-term 0% interest offer or as long as 12 months with an APR ranging from 10% to 30% based on creditworthiness. There are no late fees, prepayment fees or deferred interest charges. If the retailer you’d like to buy from doesn’t already partner with Affirm, you can get a virtual card number from Affirm to make your purchase and pay Affirm back using the payment plan you selected.
Afterpay
Afterpay offers a short-term installment plan via its app. You download the free app to purchase your item using a virtual credit card number and then make the first of four payments and the rest spread out over six weeks. Afterpay will set a limit on how much credit they’ll extend to you, so you won’t overextend yourself. Make your payments to them on time, or your account will be paused and you might get hit with late fees that can be as much as 25% of the purchase price of the item.
Klarna
Klarna offers an interest-free ‘Pay in 4” plan that allows shoppers to split any purchase into four installment payments. They also offer on some purchases a “Pay in 30” plan. If the retailer you’re shopping with isn’t already partnered with Klarna, you can download the Klarna app and make any online purchase via Klarna. If you miss or skip one of your four payments, you’ll be charged a late fee of up to $7.
But, if you’re on a “No Interest If Paid In Full” plan and you can’t make a payment, know that you’ll be charged deferred interest on the entire purchase at a rate of 19.99% APR.
PayPal Credit
Previously known as Bill Me Later, PayPal Credit offers installment plans on purchases of $99 or more, with no interest if paid in full within six months. Unlike some of the other BNPL plans, PayPay Credit is a line of credit issued via Synchrony Bank so there will be a hard credit check for approval.
If you don’t pay your balance in full, you’ll be subject to deferred interest on the entire amount of the purchases at a rate of 23.99% variable APR.
QuadPay
QuadPay offers a pay-in-four installment plan, spread out over six weeks. You’ll pay 25% of the total cost of the purchase upfront using your linked debit card or credit card, and the rest of the payments divided into three more installments, each due two weeks apart. QuadPay doesn’t charge any interest or fees if you make your payments in full and on time.
If you do pay late, you’ll be charged a late fee of either $5, $7 or $10 depending on what state you live in.
Sezzle
Sezzle offers a repayment program to those who qualify made up of four payments spread out over six weeks. When you shop through a merchant that offers Sezzle, you’ll pay 25% upfront of the total cost of the purchase to Sezzle, and the remaining payments divided up across three more installments, each due two weeks apart. There are no additional fees or interest as long as you make your payments on time. If you do pay late or miss a payment, you will be charged a late payment fee.
Be aware you may not get approved for expensive purchases the first time you use Sezzle. The company partially bases your limit on previous payment history with Sezzle and says that if you’re turned down for a purchase made through Sezzle, making smaller purchases over time can help build up your credit with Sezzle. Keep in mind that Sezzle does not report to the three main credit bureaus so regardless of how much you can spend via Sezzle, it won’t have any impact on your credit score.
Credit Card Plans
American Express Pay It Plan It
Amex’s Pay It Plan It feature lets cardholders split eligible purchases of $100 or more into fixed monthly installments when you charge your purchase to an eligible card. You can combine up to 10 purchases on your account. Each monthly installment will include a fixed monthly fee that you can review upfront before deciding if this option is right for you.
My Chase Plan
My Chase Plan lets Chase cardholders break up the cost of a purchase of $100 or more into equal monthly payments with no interest. A fixed monthly fee is added to each monthly payment. Payment plans range from three to 18 months, based on the purchase amount, your creditworthiness and your account history with Chase.
Citi Flex Pay
Citi Flex Pay lets you take an eligible Citi credit card purchase and pay it off over a set duration with fixed payments and a fixed APR. It’s part of Citi’s Flex Plan program which also includes a Citi Flex Loan option that allows you to take out a loan against your card’s credit line. Citi Flex Pay options vary by purchase, your credit history with Citi and the amount of the purchase. This makes Citi Flex Pay more opaque than some of the other credit card programs since there’s such a wide range of availability, prices and term lengths.
Bottom Line
Buy Now, Pay Later plans can be an effective way to spread out the pain of a large purchase. But before you sign on the dotted line, be sure to take a good look at the exact costs involved. Also be sure you’ll be able to pay off the loan in time in order to avoid interest charges and late fees.
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Buy Now, Pay Later: Here's What You Should Know About Offers From Affirm, Klarna, AfterPay And Other Installment Purchases - Forbes
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