Buy Now, Pay Later: How It Works, the Real Costs and the Risks

Buy now, pay later (BNPL) services, offered at checkout by companies like Affirm, Klarna, Afterpay and PayPal, let you split a purchase into smaller payments. They're popular for holiday shopping and everyday purchases. Used carefully they can be free; used carelessly they lead to fees and overextended budgets.

How BNPL works

There are two main types:

• Pay in 4: the purchase is split into four equal payments, usually every two weeks, with the first due at checkout. These typically charge no interest.
• Monthly installment loans: for larger purchases, paid over several months or years. These may charge interest, sometimes at rates similar to credit cards.

Approval is usually instant, often with only a soft credit check.

Example: pay in 4

You buy a $240 jacket. You pay $60 at checkout and $60 every two weeks for six weeks, automatically charged to your debit or credit card. If every payment goes through, you pay $240 total.

The real costs and risks

• Late fees. Missing a payment can trigger a fee, and some providers charge more for larger purchases.
• Overdraft fees. Automatic payments drawn from a low checking balance can cause bank overdraft charges.
• "Loan stacking." It's easy to have several plans open with different providers, adding up to a big monthly bill that's hard to track.
• Interest on longer plans. Monthly installment plans may carry high APRs.
• Harder returns. If you return an item, you often keep paying until the refund is processed.
• Fewer protections than credit cards in some disputes.

Does BNPL affect your credit score?

It can. Some providers report payment history to credit bureaus, and credit scoring companies have begun including BNPL data in newer scoring models. Late or missed payments can hurt your score, and an account sent to collections definitely will. On-time payments may help, depending on whether they're reported and which score a lender uses. Learn more in how credit scores work.

BNPL vs credit card

If you always pay your card balance in full, a credit card may be the better tool. If you tend to carry a balance at 20%+ APR, an interest-free pay-in-4 plan paid on time can cost less, but only if it doesn't encourage you to spend more.

Rules for using BNPL safely

1. Only use it for purchases you could pay for today. BNPL should spread out the cost, not stretch your budget.
2. Limit yourself to one plan at a time.
3. Put every due date on your calendar and make sure the account has money.
4. Avoid BNPL for everyday essentials like groceries. Needing it there is a sign the budget needs attention. See the 50/30/20 rule.
5. Read the terms for interest, late fees and how returns work.

If you're behind

Contact the provider before a payment fails. Many offer short extensions. Pause new BNPL purchases, list all open plans and their dates, and if you have several debts, use a payoff method like the avalanche or snowball.