Buy Now Pay Later (BNPL): How It Works and What You Need to Know

If you’ve made an online purchase over the last few years, you’ve probably seen an option to buy now pay later (BNPL) on the checkout page. There are various providers and options for BNPL loans, but they all have one thing in common: They allow you to break a purchase down into smaller, interest-free payments.

Global BNPL payments reached more than $120 billion in 2021, representing a growth rate of 85% from 2019. But just because the market is booming, it doesn’t necessarily mean you should join in the trend. We’ll run through everything you need to know before you give it a try, including how BNPL works, key examples and the potential downsides.

What is BNPL?

BNPL is a financing solution that lets you pay for a purchase through installments instead of paying for everything upfront. Unlike other loan types, such as credit cards and personal loans, BNPL lenders generally don’t charge interest (as long as you keep up with your payment schedule).

This makes BNPL a more appealing and seemingly affordable option for many consumers since the loans make it possible to cover costs in small chunks.

Another crucial feature is that you take out a BNPL loan at the point of sale and not before you shop for a purchase. 

How does buy now pay later work?

The finer details of how BNPL loans work can vary depending on the provider and product you choose.

BNPL is mostly used in the world of e-commerce. You’ll often see an option to take out an interest-free payment plan on a retailer’s checkout page, which will direct you to apply for a loan with a BNPL provider. 

In other cases, you can make a purchase directly from the BNPL provider’s app or use the app to pay for an item at a participating retailer’s physical store — similarly to using Apple or Google Pay. Some lenders will give you a one-time virtual card to use for a purchase, allowing you to buy now pay later at any shop that accepts the relevant card network (such as Visa).

When it’s time to pay, you only need to cover a percentage of the item’s cost. A standard BNPL plan breaks the purchase down into four payments, the first of which you cover at the time of sale. For example, you might buy a $200 pair of sunglasses and pay $50 upfront and then $50 every two weeks for the next six weeks. 

But there’s variation in the number of payments and the intervals between them. One loan might involve four payments split across a month, while another lender asks for one payment per month for three months.

As long as you stick to the agreed payment plan, you won’t have to pay any interest on your purchase. However, you could face late fees or an interest rate charge if you miss your payments or fail to pay off the loan by the end of its term, i.e., the date of the final payment. There also might be other fees for using the service.

Providers and examples of BNPL

Whether you want hotel stays, furniture, flights, tech or anything in between, there’s a good chance BNPL is available.

Perhaps the best-known BNPL provider is Klarna, which boasts more than 250,000 retail partners across the globe and offers borrowers a few ways to pay.

However, it has plenty of competitors. Other big names in the space include Afterpay, Zip (formerly Quadpay), Affirm and Sezzle.

All of these solutions are BNPL specialists, and in true fintech fashion, they operate primarily as smartphone apps. But the popularity of BNPL over recent years has encouraged other established retailers and payment providers to get in on the action.

PayPal now has its own program (PayPal Pay in 4), and even the credit card issuers Chase and American Express have followed suit. In addition, e-commerce giant Amazon launched Amazon Buy Now Pay Later (called Amazon Monthly Payments), and then Walmart uses Affirm for its Buy Now Pay Later program.

In other words, name just about any retailer, and it probably has either a relationship with a BNPL provider or offers its own BNPL financing options. The marketing for these loans is everywhere — but does that mean you should get involved?

Should I use BNPL?

When you really want to purchase a good or service and there’s a way to do so through interest-free installments, it may seem irresistible and harmless.

But should you really use a BNPL tool? Despite these clear benefits, there are also some hidden dangers of buy now pay later. 

Effect on finances

Essentially, lenders like Klarna make money by encouraging you to buy more than you need to. 

It might not seem like a big deal to make one $50 payment per month as part of your installment plan. But if you have multiple commitments like this, your budget can quickly become unmanageable — and a large portion of your disposable income will become swallowed up by your loans. This can make it difficult to pay your other bills or cover an emergency expense.

Plus, a lesser-known complication is obtaining a refund after buying an item through BNPL. Because you’ve involved a third party in the transaction, you may need to contact both the BNPL lender and the retailer to get your money back. The process will differ depending on exactly which providers and product you opted for, but many people have encountered difficulties.

Effect on credit score

If you have bad credit, you might think a BNPL service is a good option to build your credit score. But most of the time, BNPL lenders don’t report timely payments to credit bureaus, which means that making on-time payments won’t help improve your credit. Yet if you miss multiple payments and your account goes to collections, the information will be passed on and could damage your score further.

There is one exception, however. The credit bureau Equifax recently started accepting data from BNPL lenders, which it will use for its credit reporting. 

In addition, depending on the product you choose, applying for a BNPL loan could result in a hard credit inquiry (which can negatively affect your credit score). In most cases though, BNPL loans involve soft credit checks, which don’t impact your credit score.

Overall, the possible benefits of BNPL don’t outweigh the risks. So, what should you do instead?

BNPL alternatives

It’s best to avoid buy now pay later plans where possible due to the damage they can do to your finances.

The best payment option is budgeting for your purchases by saving the money in advance. After all, a BNPL plan effectively forces you to budget for something after you’ve bought it by splitting it into monthly payments. Instead of making weekly $50 payments for a $200 purchase after you buy it, you could simply save $50 a week for four weeks before you buy it.

Then, once you have the money, pay in cash (or by debit card) instead of putting the purchase on credit.

This helps to ensure you won’t buy something you can’t afford, giving you a clearer picture of your finances. 

Put your finances first

Buy now pay later (BNPL) loans might have become popular payment options, but they come with various risks and downsides. When you delay all your payments, you can reach a point where a large chunk of your monthly income goes toward your repayments — not to mention other complications such as difficult returns. Instead,  budget for items you want to buy in advance, then pay in cash.

This is especially important if you already have debt. To help you manage your credit card debt, consider the Tally† credit card payoff app. It combines your higher-interest cards into one payment and gives you a lower-interest line of credit, which helps you tackle your debt more efficiently.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.