Whether you’re eyeing an expensive sofa or a new TV, you may be tempted to take advantage of “buy now, pay later” (BNPL) options at your favorite retailer. These services allow you to split the cost of your purchase into several fixed payments. But you should understand the costs and risks before using BNPL.
We’ll cover how buy now, pay later works, when to use it, and some alternatives, such as a personal loan, so you can decide if it’s the right financing option for you.
What is buy now, pay later?
While the terms vary depending on the plan you choose, buy now, pay later generally allows you to pay for your purchase interest-free over several weeks or months. Most companies also offer the option to pay for your purchase in monthly installments over time. These plans may or may not impact your credit, depending on the service provider. Some BNPL companies also charge fees for using the service or paying late.
Below are some of the most popular buy now, pay later companies and the financing options they offer.
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How does buy now, pay later work?
With most BNPL companies, you’ll pay for 25% of your purchase on the day of your order, and then make three equal payments every two weeks after that, to qualify for the interest-free option.
For example: If you make a $200 purchase, you’ll pay $50 upfront and $50 every two weeks afterward. The installments may be automatically withdrawn from your method of payment, or you may have to set up autopay. There may be late fees if you don’t pay on time, or you may pay credit card fees or finance fees.
Many BNPL companies also offer monthly installment loans, with the annual percentage rate (APR) determined by your credit score. The APR represents the total cost of borrowing, including the interest rate and fees, each year. It’s expressed as a percentage of your purchase amount.
Your payments may be reported to the credit bureaus, depending on the plan. That means using BNPL can hurt your credit, but it may also allow you to build credit.
There are some drawbacks to using BNPL, even if you choose the interest-free option. You may not be able to dispute the payment to the retailer, since that’s protection you get from your credit card.
Splitit is an exception — the service allows you to keep all the benefits of using your credit card, including rewards and transaction insurance. Some plans give you the choice of paying with a credit card, which adds protection.
Returns can be messy as well. Depending on the loan agreement, you may need to keep making payments until the return is processed.
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
Is buy now, pay later a good option?
When deciding to use buy now, pay later, it’s important to consider the pros and cons.
Pros
- May offer interest-free financing: Some BNPL lenders allow you to pay over time without incurring interest. Some companies also don’t charge any fees.
- May not impact credit: Some pay-in-4 plans will not impact your credit score, but check with the lender before applying.
- Easy application: You can apply during checkout, often in just a few steps. Approval decisions are instant.
- Available at major retailers: Whether you’re buying a pair of sneakers or a new mattress, you’ll likely find BNPL options available.
- No need for a credit or debit card: If you pay through a BNPL company, you can typically make the purchase directly from your checking account.
Cons
- May encourage overspending: It’s generally not a good idea to buy something you don’t have the money for now, unless it’s a necessary expense. If you don’t budget carefully, you could end up with insufficient funds to make your payments and incur a late fee.
- Longer terms come with interest: If you need more than six weeks to pay for your purchase, you may pay interest.
- Some plans charge fees: Some plans come with credit card convenience fees, funding fees, late fees, or fees for rescheduling your payment.
- Disputing or returning your purchase may be difficult: Depending on the plan, you may have to take extra steps to return your purchase, and you may not be able to dispute the transaction if you don’t use a credit card.
Buy now, pay later alternatives
Here are some alternatives to consider.
Personal loan
If you need more than six weeks to pay off your purchase, you may consider taking out a personal loan instead, especially if it’s a large purchase that you need a few years to pay off. Personal loans generally come with lower rates than credit cards, and most come with longer repayment terms than BNPL loans. You can also use the money for almost any expense, not just purchases at major retailers. And you’ll build credit if you make your payments on time.
0% APR credit card
Many major credit card issuers offer a 0% introductory APR to new cardholders, which can help you avoid interest on all your purchases for as long as 21 months. Some store-branded credit cards may offer an even longer interest-free period on certain purchases.
If you think you’ll struggle to repay the purchase in six weeks and you have good credit, a 0% APR card can be a great alternative to BNPL. Just make sure you still budget to pay off your purchases before the introductory period is up.
Related: Personal Loan vs. 0% APR Credit Card
FAQ
How is buy now, pay later different from a layaway program?
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Does buy now, pay later affect your credit score?
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Can I use buy now, pay later with bad credit?
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