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Afterpay: What It Is and How It Works

Afterpay is a service that allows you to borrow money on the spot when making a purchase and then repay it with installment payments.

Chris Scott

Contributing Writer at Tally

May 26, 2021

If you've recently gone shopping, you may have come across a service called Afterpay that allows you to break up your purchase into installments. Essentially, Afterpay allows you to buy now and pay later. In some regards, Afterpay is similar to a credit card in that you can borrow money for a purchase and then later repay the lender. 

In this article, we answer the question, “How does Afterpay work?” We go over what Afterpay is, how it works and how it can impact your credit history. We also review the various benefits and downsides to using the Afterpay service as well as other available alternatives. By the end, you should have a clear understanding of whether Afterpay is a viable option the next time you make a purchase with your favorite retailer. 

What is Afterpay? 

Afterpay is a buy now, pay later service offered both online and in-store. Currently, there are more than 63,000 retailers in the United States that offer the service. Afterpay is technically a point-of-sale loan, as it lends you money immediately during the checkout process when you are making a purchase. You, as the borrower, are then required to repay the money. 

How Does Afterpay Work? 

Let's say that you're going to buy a new TV that has a purchase price of $5,000. You don't have enough money on hand to complete the purchase. You can sign up for Afterpay on the spot. Afterpay then pays for the product, and you get to take the TV home immediately that day. 

You are then required to repay Afterpay in installments. Repayment goes to Afterpay, not the merchant you purchased from. 

Though it can vary, repayment often occurs in four installments, typically spread over six weeks. The first installment is due the day of the purchase. Based on the example above, the first payment of $1,250 would be due at the time of purchase. In another two weeks, you would owe another $1,250 (though you can certainly pay it early). You continue to make these installment payments until you repay the purchase amount in full.

Often, there aren’t any interest or fees associated with borrowing, as long as you don’t miss payments. However, once you miss an installment, you're charged late payment fees. The maximum late fee is $8 per missed payment.

There are multiple payment options available for repayment. These payment methods include: 

  • Debit cards.

  • ​Credit cards.

  • Direct bank accounts.

You might consider using Afterpay if the credit limit on your credit card wasn’t high enough to cover the purchase price. For instance, you may be able to put $1,250 on the credit card every two weeks, but you don’t have enough available credit to put the entire $5,000 purchase on your credit card upfront. 

Does Afterpay Build Credit?

Afterpay doesn’t help you build credit. However, it won't necessarily hurt your credit either. 

Afterpay does not report your repayment history to credit bureaus. If you make on-time payments, you will not boost your credit score, and it will not show up on your credit report. So, you could be missing out on a way to build credit, as you're not receiving any perks for practicing responsible borrowing. 

On the other hand, Afterpay does not report missed payments either. So while you’ll be charged late fees if you miss a payment, those are addressed internally with Afterpay. This is different from a credit card, which will report missed payments to credit bureaus, therefore lowering your credit score. So, if you're known to miss a payment or two, Afterpay could be a solution to borrow money without harming your credit. 

Additionally, you can open an Afterpay account without the company running a credit check, otherwise known as a hard inquiry. A hard inquiry will lower your credit score, albeit temporarily.

In summary, the answer to the question, "Does Afterpay build credit?" is no. But, it does not harm your credit either. 

What Are the Benefits of Afterpay? 

There are a few benefits of using Afterpay. 

Available even with bad credit 

​If you have a bad credit score (or no credit history at all), you may struggle to find borrowing options. Afterpay makes it possible for you to borrow money since it does not perform a credit check when opening an account. Other financial products, including personal loans and credit cards, require at least a soft inquiry. 

Afterpay makes it possible for you to make a large purchase with borrowed funds. You can receive the money upfront immediately after signing up. 

No impact on your credit history 

If you miss a payment, you will not harm your credit history or negatively impact your chances of securing credit in the future. The same can’t be said about missing a payment on credit cards or loans.

Interest-free financing 

Afterpay offers interest-free financing on its point-of-sale loans. All you need to do is make installment payments on or before each due date. If you borrow $6,000, you are only responsible for repaying $6,000. 

Even if you miss a payment, you are not charged interest, since there is no interest rate. You are charged flat-rate late fees instead. This is different than when you miss a payment on a credit card and are charged a late fee as well as a penalty APR. 

Great for budgeting 

Because your purchase is broken out into equal installments, it may be easier to work them into your budget. Whereas a credit card balance is due within 30 days of it appearing on a statement, your Afterpay purchase is spread out over six weeks. This should allow more flexibility when budgeting and crafting a payment plan. 

What Are the Downsides to Afterpay? 

Many online shoppers love Afterpay, but it often seems too good to be true. There are some downsides to consider before placing an Afterpay order. 

There are late fees 

Though interest rates may not increase, there are still consequences to missing payments. If you miss a payment by 10 days, you are charged up to an $8 late fee. You’re charged this fee with every missed payment until the total of your late fees equals 25% of the amount of the original purchase. Additionally, once you miss a payment, access to your Afterpay account will be restricted until you have repaid all outstanding balances. 

You don't receive credit for good spending habits 

Abiding by the payment schedule will not raise your credit score. If you open a credit card and repay the balance in full before the due date, you will build credit. This, in turn, can put you in a better position to, say, buy a home or car. 

Afterpay does not report your repayment history to credit bureaus, so you will not receive credit for practicing responsible borrowing habits. 

It's not available everywhere 

As mentioned, there are 63,000 retailers in the United States that use Afterpay. However, there are more than 1 million retail establishments in the United States. There is a decent chance that your favorite store does not offer Afterpay, which means you'll need to use a different payment platform to fund the purchase. 

Are There Alternatives to Afterpay? 

Yes, there are two primary alternatives to Afterpay: Affirm and Klarna. They are each a bit unique in their own right. For example, Affirm performs a soft credit inquiry and has a more rigid approval process. 

Remember though, there is limited access to these services. Only one option may be available at your favorite store. Be sure to do your homework in advance so you know what you’re signing up for before committing to anything. 

How Does Afterpay Work with a Credit Card? 

You must use a debit or credit card to repay your Afterpay loan. You can set up the card so that it’s charged automatically every two weeks to avoid missed payments. Then, if using a credit card, you’ll pay your credit card balance (or your minimum monthly payment) by the due date like you normally would. If you pay off your credit card when it’s due, using this financial tool could work to your advantage. If you link a debit card to your Afterpay account, it's important to make sure the funds are in your bank account when each Afterpay payment is due.

For example, let's say that you have a credit card that offers cashback. But the credit limit on the card is lower than the total purchase amount. You use Afterpay to make the purchase and then repay Afterpay using your card. This allows you to stretch the cost of the purchase over an extended period of time while also earning cashback, which Afterpay does not offer directly. 

Of course, earning cashback is only useful if you make on-time payments. If you happen to fall behind on payments and begin collecting debt, a credit card payoff app like Tally can help.

Is Afterpay Right for You? 

Afterpay is a unique service that allows you to immediately borrow money to fund a purchase. You then repay in installments, stretching the cost of the purchase over a couple of weeks. Though you can be charged late fees, Afterpay offers zero-interest financing. 

By practicing good financial habits like budgeting and making on-time payments, Afterpay is a solution that could potentially work for you.

If you have a balance on your credit card that you need to pay off after making your installment repayments to Afterpay, be sure to check out Tally. Tally is a credit card payoff app designed specifically to help you pay down your balances in the most efficient way possible.

Trying to pay down credit card debt? See how Tally can help.