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Should I Use a Buy Now, Pay Later Tool?

Buy now, pay later offers an easy option at checkout, but is it worth using tools like Klarna or Affirm?

July 19, 2022

Online shopping has surged in popularity, with an estimated 80% of Americans making purchases online. In recent years, you may have noticed a new payment option at checkout when shopping online: The “buy now, pay later” option. 

These services may be tempting, but they certainly have some downsides. You may have questions about them — how does Klarna work, the Affirm app, or other competing services? Here’s what you need to know. 

What is buy now, pay later? 

Buy now, pay later services allow you to break up a purchase into several installment payments. 

For example, if you’re buying a $200 backpack, a buy now, pay later service may allow you to pay for it in four installments of $50 each. 

The use of these services is rising rapidly. A reported 60% of Americans who shop online have used buy now, pay later services.

There are several different buy now, pay later services, with the most popular being Affirm, Afterpay and Klarna. 

How does buy now, pay later work?

How does Klarna work, or other similar services, for that matter? 

Buy now, pay later programs allow you to pay for a purchase in 4 installments (or fewer), usually around 4 to 6 weeks. 

Typically, a shopper can provide basic information and get a short-term, interest-free loan. Then, they make the down payment on the item, typically 25% of the purchase price. After that, they’ll make weekly or bi-weekly payments. 

A $200 purchase through a program like Klarna may look like this:

  • A $50 downpayment on March 1st

  • The next $50 payment is due on March 15th

  • The third $50 payment on March 29th

  • The final $50 payment on April 13th

Most of these programs do not charge interest, simply dividing the total cost into even installments. Four installments is standard, but some services may offer different options. 

How do buy now, pay later programs make money?

If there are no interest charges, how do these companies make money?

While BNPL is often considered “interest-free,” some BNPL services charge interest on certain types of loans. For example, one popular BNPL service charges interest on larger loans and loans with longer repayment plans. With some services, APRs can range up to 30% for large loans. 

The variety of loan types and terms can confuse some borrowers. When using one of these services, check the fine print to know what borrowing expenses you may face. 

Most buy now, pay later platforms make a profit by charging the retailer a small fee — often around 4% of the purchase price. 

For retailers, the advantage is that buy now, pay later often encourages people to spend more money than they otherwise would. This is one of the reasons to be wary of these services, as we’ll discuss more below. 

Pros and cons of buy now, pay later

These tools provide a convenient option for shoppers, but there are both advantages and disadvantages. 


  • Splitting purchases into smaller payments

  • Usually interest-free

  • Convenient

  • Pay off items on payday or whenever you have free cash flow 

The main advantage of buy now, pay later (BNPL) is that it’s convenient and lets you split up purchases into smaller chunks. For those on a tight budget, this can be very helpful for making purchases. 


  • Easier to spend more than budgeted 

  • Doesn’t build credit 

  • Late payments can hurt your credit score

  • Fees for missed payments

  • Complicates the return process

The biggest downside of BNPL is that it encourages shoppers to spend more. Buying a $180 pair of headphones may seem too expensive — but four payments of $45 seem much more approachable. 

This mentality can lead shoppers to spend more than they have intended to. This is particularly true of younger shoppers. The buy now, pay later trend is helping to push Gen Z into debt

BNPL services essentially reduce the friction involved in making a purchase. They make the amount you’re spending seem less significant — which may encourage you to spend more freely. 

Worse still, some BNPL users are using credit cards to pay off their BNPL loans — creating more high-interest debt. 

When does it make sense to use buy now, pay later tools?

There are some situations in which BNPL does make financial sense. 

For example, using BNPL to pay for a necessary emergency expense could be wise. For instance, if your dishwasher breaks and you need a new one, using BNPL could help you buy a new appliance today without worrying about paying for it all upfront. 

Unfortunately, these kinds of necessary purchases aren’t the primary way that consumers are using BNPL services. The most common categories are clothing and electronics

This shows us that most BNPL users are using the service to purchase largely optional things, often going into debt. 

How does buy now, pay later affect your credit score?

Because BNPL services are relatively new, there is a lot of confusion about how they might affect a person’s credit score

There are three ways that using BNPL might affect your credit. 

  • Initial inquiry: When you sign up for a service, they will pull some information from your credit report. In most cases, this is a soft credit pull, which does not directly affect your credit. However, some services — or some versions — may use a hard credit pull, which can have a small negative impact on your credit.  

  • Late payments: If you miss a payment or are late, the BNPL service may report this as a derogatory mark on your credit report. This can lower your credit score. 

  • Collections: If you fail to pay your outstanding balances, the BNPL service may send your debt to a collections agency. This can have a significant negative impact on your credit.

How does Klarna work compared to using a credit card? Credit cards report balances to the credit bureaus. But making on-time payments on your credit card will help you build credit, whereas BNPL services typically have no positive impact on your credit score. 

Final thoughts

Overall, buy now, pay later services offer a convenient option to shop online. Just be sure you can pay off the loan in time. 

And more importantly, be mindful of whether the service encourages you to spend more. If you had to pay the full cost upfront, would you still be making the purchase? 

Is credit card debt preventing you from reaching your financial goals? Tally† is an app that may help qualifying Americans consolidate credit card balances into a lower interest line of credit. Learn how Tally works here

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