What is buy now, pay later?
Though the idea of paying in installments over time is not new (layaway programs have been around for many decades), buy now, pay later programs rose in popularity in recent years. As more people were shopping online, more buy now, pay later providers surfaced at checkout—like Affirm, Klarna, and Afterpay. In 2021 alone, five major providers issued more than 180 million buy now, pay later loans worth more than $24 billion—almost 10 times the amount issued in 2019.1 Studies show 50% of consumers have used a buy now, pay later service.2
These third-party companies divide your purchase into multiple equal payments, with the first due at checkout. The remaining payments are billed to your debit or credit card in weekly, bi-weekly, or monthly installments—depending on the provider’s payment plan.
PRO: Typically zero interest and minimal fees
If you pay over four installments every two weeks (commonly called “pay in four”), most buy now, pay later companies don’t charge interest—so your $800 laptop will really cost $800. Some charge late payment fees, usually between $5 to $10.
CON: Can lead to overspending
It can be tempting to splurge when you don’t see the full impact on your bank account until weeks later. And merchants are hoping you give in to that temptation. “Retailers are jumping on this bandwagon because they can get higher ticket orders than if the consumer has to pay everything at once,” says Dr. Patricia Huddleston, retail strategy expert and professor of retailing at Michigan State University.
Whenever you’re spending money, it should align with your budget and values. So while it may be enticing to buy the latest shoes, gaming system, or couch and pay for it in four interest-free payments, check in with yourself and make sure what you’re buying really matters to you. And if you do make a purchase using a buy now, pay later program, make sure to update your budget to reflect the delayed payments.
PRO: No credit impact upon application
Buy now, pay later companies may perform a soft credit check for new customers when they first sign up, but soft credit checks will not impact your credit score or credit history.
When you apply for a new credit card, a hard inquiry (which can temporarily lower your credit score) is placed on your credit report, even if you’re not approved. This makes buy now, pay later financing appealing, especially if you don’t have a credit card and don’t want to ding your credit score by applying for one.
CON: Negative impacts to credit for missed payments, but no benefits to credit for on-time payments