Buy Now Pay Later Services: What You Should Know

Wednesday, December 22, 2021
Buy Now Pay Later

Shop online for the holidays, and you’re almost certain to see an option to break that price into much smaller payments over a period of time — services known as Buy Now Pay Later programs or BNPL. Some brick-and-mortar merchants are offering these types of installment payment options for their purchases as well. It’s becoming quite a popular way to buy goods, especially expensive goods:

  • “Consumers will make nearly $100 billion in retail purchases using BNPL programs in 2021—up from $24 billion in 2020 and $20 billion in 2019,” according to Forbes.
  • The most common reason to use these types of payment plans is to make purchases that don’t fit within budget, according to The Ascent.
  • “More than 4 in 5 adults who plan to use BNPL this holiday season [2021] are using it to pay for gifts,” according to a Morning Consult survey. They anticipate “spending more than the average gift giver—by a lot.”

BNPL isn’t always as straightforward as it at first appears. Before you tap the “$11.67 per month for six months” option, be sure to read the fine print that explains how the BNPL service will work for that particular purchase. In the meantime, here’s what you need to know about Buy Now Pay Later programs.

What Is a Buy Now Pay Later Program?

Simply put, BNPL services are financing options for everyday purchases. The idea behind a buy now pay later plan is to buy an item at a special price and pay for the item over time in a certain number of equal, set payments that add up to no more than the original purchase price. For example, you want to buy a $100 jacket and see an option for four equal payments of $25—$100 total. If you select the installment or BNPL option, you can get your jacket with the initial payment of $25 and pay the remaining $75 over the next three scheduled payments of $25 each.

Ideally, a BNPL transaction offers consumers a way of paying for purchases over time without incurring the fees or interest associated with credit cards. However, the reality of a transaction and the BNPL servicer’s terms and conditions can make the bottom line a bit more complex.

How Buy Now Pay Later Transactions Work

  1. The variety in merchandise selling platforms and the differences among available BNPL service providers mean that BNPL transactions can seem similar yet vary considerably. At the most basic level, it’s a user-friendly process:
  2. You decide to purchase an item and place it in your shopping cart.
  3. When you check out and pay, you select the BNPL option that works best for you.
  4. Since BNPL service providers reserve the right to approve the transaction, they’ll request relevant personal information that will allow them to quickly approve or decline your purchase.
  5. If the BNPL service provider approves the purchase, it will immediately charge you the initial installment and establish a timeline for the remaining payments.

Many of the providers function as an app on your smartphone or as an extension that can be added to your browser, allowing you to shop online or in-store and choose the BNPL option. Some of the most popular BNPL service providers include names that are probably already familiar to you: Affirm, Sezzle, Afterpay, Splitit, Perpay, PayPal Pay in 4, Paidy and Klarna.

While most BNPL servicing apps can be used standalone, some retail companies partner with a specific third-party BNPL service provider. For example, Amazon has officially partnered with Affirm to allow purchases of $50 or more to be split into monthly payments. Meanwhile, Affirm is also a BNPL app that you can use anywhere.

The Pros and Cons of Buy Now Pay Later Programs

BNPL programs offer a convenient shopping service. However, the experience does come with a few caveats to consider:

  • The potential BNPL payment plan cost amount alongside an item’s full purchase price actually shifts a buyer’s mindset from the total cost and affordability of the item to the cost and affordability of a payment. This can be extremely helpful for budgeting for a large-ticket necessity, but it can lure consumers into buying more than they can afford—especially if multiple BNPL purchases start to accrue. According to the Morning Consult survey, each item bought through BNPL services as a holiday gift tends to cost as much as the total holiday spending for an average consumer not using BNPL services.
  • Selecting a BNPL option at checkout initiates a modified application process. Most apps require that you supply some basic personal information that will allow them to do a soft credit check before approving the transaction. The soft credit pull does not negatively impact your credit rating. However, a few BNPL service providers do use a hard credit pull for large-ticket items or extended repayment plans — or simply as a standard practice.
  • While a biweekly four-payment model represents the classic BNPL repayment arrangement, BNPL providers now offer increasing variety in the number, frequency and terms of payments. You may have the choice of repaying every two weeks or monthly, for example. Your total may be divided into four payments, six or more. You may have the option of delaying your payment by as much as 30 days or shifting payments by two weeks. Each of these options may carry different fees or even interest rates for the convenience offered. For example, delaying payment for an additional 30 days may come with a 15 or 25 percent interest rate or a hard credit check. Or, changing a due date may be free the first time, but altering the successive payment due dates may carry fees.
  • Once a purchase is approved under a payment plan, the BNPL provider will ask for a credit card or debit card and charge the initial payment to you. Once the first payment is complete, you’ll receive your item. This is more convenient than layaway programs. Under layaway programs, the retailer collected preset payments, but the consumer couldn’t have the item until the full balance had been paid.
  • Most BNPL providers will send notices of upcoming payments due and encourage you to set up payment with a credit card or debit card to avoid late fees. Being late with a payment, failing to make a payment or paying the merchant rather than the BNPL provider can result in costly fees, interest rate increases and negative reporting that can affect your credit. While some BNPL apps may advertise “no late fees,” they usually have interest rates or other financial features that penalize late payments.
  • If you need to return an item to a retailer, be sure you understand how the BNPL program handles that. In most cases, you’ll have to continue to make timely payments until the merchant receives the return and credits your account.

Most of these apps include learn more buttons or supplemental links that are worth clicking before you buy. This is often where you’ll find the details on fees and additional charges as well as what you need to do to avoid them.

Stay Financially Sharp with La Cap

If you would like to learn more about ways of managing your money and budgeting for the necessities of life—or a few well-deserved luxuries—take advantage of our financial education services. At La Cap, we see you as a member of our community. We want to give you the means of making the best financial decisions for you and your family because we understand that, by helping you to succeed, we’re helping our entire network thrive and grow.