Buy Now, Pay Later: Is it Right for You?

Have you noticed a new way to pay online and at checkout called Buy Now, Pay Later (BNPL)? 

It can be helpful if used safely and carefully, especially for larger purchases — but there are some things worth knowing before you use it.

We’ve broken down what it is, how it works, and the pros and cons — so you can decide if this new type of loan is right for you. 

Please Note: This article provides general information and is not legal or financial advice. AARP Foundation does not endorse BNPL providers.

What is Buy Now, Pay Later?

Buy Now, Pay Later is an installment loan that lets you buy something today and pay for it over time. You can pay with BNPL online or in-store. Just like a credit card, you must apply and get approved to use it. Some common Buy Now, Pay Later companies you might see are Klarna, PayPal Pay Later, Afterpay, Affirm, and Zip.

You usually have two options to spread out the purchase cost using Buy Now, Pay Later:

• Pay in 4: Pay off your purchase in four payments spread over a few weeks. This option usually charges 0% interest as long as you pay on time.
• Monthly: Pay a portion of what you owe every month for three to 36 months. This option often charges high interest rates, like a credit card.

Some apps — like Afterpay and Affirm — let you choose between short-term and long-term plans depending on what you buy. 

How does Buy Now, Pay Later work?

When buying an item, you might choose to pay with BNPL instead of using a debit or credit card. You may have seen this in the virtual checkout online or at the checkout counter in person.

Let’s say you want to buy a $200 vacuum cleaner using the “pay in 4” option with Klarna. You would pay 25% of the total cost ($50) when making the purchase, then you would make three more payments of $50 over the next six weeks (the remaining $150). The four payments are billed — usually on auto-pay — to your debit card, bank account, or credit card.

Buying something more expensive like a new refrigerator or car repair? A BNPL app like Affirm will allow you to take longer to pay off a larger amount of money. Each month, you pay back a fixed amount — plus interest — until you’ve paid off the loan.

What are the pros and cons of Buy Now, Pay Later?

Many BNPL plans let you split up payments with no interest or fees — as long as you pay on time. This can make it easier to buy bigger items, like a couch or mattress. However, BNPL plans also come with risks you should know about.

Here are some of the main pros and cons of Buy Now, Pay Later to keep in mind:

How do I avoid extra costs when using BNPL?

Follow these simple tips to protect your money and stay on budget:

• Read the details: Know what you’re signing up for and double-check before signing.
  • Even with zero interest, you can get hit with late fees for missing a payment.
  • Failure to pay could lead to debt collection, which may affect your credit score.
• Keep the full price in mind:  A low price today can be exciting. Just be sure to check the total cost over time so you know exactly what you will be paying.
• Check your bank account: Keep enough money in your account – you may be able to schedule your payments for right after you get paid.
• Track your due dates: Write down when payments are due on a calendar or put a reminder on your phone.
• Use only one plan at a time: Sticking to one loan keeps you from having too many bills due at the same time.

When does BNPL make sense?

People use BNPL in many different ways depending on what their household needs.

• For larger, unexpected costs: Some find it helpful for one-time emergencies, like fixing a car or replacing a broken fridge, by spreading the cost over a few weeks.
• For everyday expenses: Others use it to manage routine bills like food or gas. However, because these costs happen every week, adding multiple installment plans together can make future monthly budgeting a bit trickier to track.

Everyone’s budget is different. The main key to using BNPL safely is having a clear plan to make the payments on time so you can avoid extra late fees.