If you’ve done any online shopping recently you’re probably familiar with the option to “buy now and pay later.” This option to split your payment up into installments has exploded in popularity recently and is now a fixture alongside credit cards at checkout time when you’re shopping online. Affirm, Klarna, Afterpay, Sezzle, Zip, and even Apple all offer some form of buy now, pay later.
So how does “Buy Now, Pay Later” (often abbreviated as BNPL) work exactly?
There’s no single answer to this since the details vary by company and many companies now offer multiple options, but we’ll cover the basics here.
BNPL is essentially an installment loan, often at zero percent interest, that allows you to split your purchase up into multiple, equal payments to be paid back over a short period of time.
The most common form of BNPL is to split the purchase cost up into 4 equal installments, each due two weeks apart. You pay the first installment at checkout, like a down payment, and then the other three over the next 6 weeks. As long as you make your payments on time you won’t be charged any interest or fees so the total you pay is the same as if you paid it all at checkout.
When you “apply” for BNPL at checkout you’ll provide a few pieces of information to verify your identity and the BNPL provider will probably do a soft credit pull. This doesn’t show up on your credit report like a hard pull would and therefore doesn’t affect your credit score. One of the benefits of BNPL is a quick approval process, you’ll know in just a few seconds if you’re approved or denied and what the terms of the installment loan are.
One of the most common questions about BNPL is what the “catch” is? How do these companies make money if they don’t charge interest on the loans? It’s true that if you are late with your installment payments you can be charged interest or late fees, but that isn’t the catch.
BNPL companies make money because merchants pay them significantly higher fees than they pay credit card companies.
When you choose BNPL at checkout at an online retailer, that retailer is paying a percentage of the total cost as a transaction fee to the BNPL company, often as much as twice what they would pay a credit card company for the same transaction. Why do they do that?
Here is the real catch. The higher fees merchants pay are worth it because offering BNPL makes people more likely to buy more things and spend more money.
That’s the real risk with BNPL; that it lets you buy things you can’t afford and/or don’t really need.