What is "buy now, pay later" for online shopping?

If you’ve shopped online at all in the past few years (that’s likely all of you) you may have noticed something different on the product page or at checkout.

Buy now, pay later (BNPL) is a feature offered by a vast majority of modern retailers that enables you, the customer, to buy something now and pay for it later. That sounds nice, right? But how does buy now, pay later work? How do you use it? And, what you’re likely wondering most, what’s the catch?

We’ll tell you everything you need to know about buy now, pay later, including how you can use this feature and not abuse it.

What is Buy Now, Pay Later?

Buy now, pay later — dubbed BNPL for short — is a financial technology tool developed a number of years ago and popularized by apps Klarna, Afterpay, and Affirm, among others, that skyrocketed in usage during the COVID-19 pandemic. However, the concept behind this trendy tech tool is nothing new. It has been a strategy retailers have used for over a century to help consumers pay for expensive purchases.

Buy now, pay later is essentially a way of extending credit to consumers quickly for low-cost purchases, although it’s used for high-cost purchases too. While payment plans were once only used for large purchases like cars and couches, BNPL makes them accessible for purchases as small as a few dollars and on shorter terms i.e. weeks and months rather than years.

For the consumer, a buy now, pay later program acts as a loan. The entire purchase amount is split into equal installments that are charged in regular increments until the full amount is paid. Unlike a loan, however, most payments made through buy now, pay later programs are interest-free.

How to Use Buy Now, Pay Later

When you go to make a purchase, the option to buy now, pay later will likely look something like this next to the “add to cart” button: $100 or 4 interest-free payments of $25. The second option will likely be marked with a logo of the service provider i.e. Klarna or Afterpay.

If you select the option for “4 payments of $25” at checkout, you’ll probably be prompted to fill out a short application that includes your name, phone number, and other personal information. When you submit the application, the provider will often perform a soft credit check, which won’t negatively affect your credit score.

In most cases, in order to use buy now, pay later, you’ll need to be approved. The entire approval process will occur in a matter of seconds. So before you even click away from your browser, you’ll know whether or not you can use the feature to checkout and continue with your purchase.

If you’re approved, your purchase will be split into four equal, interest-free payments. The first of which is due when your order is executed or shipped. The remaining three payments will be automatically charged to your debit or credit card every two weeks. Thus, the entire term of the payment plan will last about six weeks.

If you’re interested in using buy now, pay later, look for it next time you shop online or ask about it next time you shop in-store.

What You Need to Know Before Using Buy Now, Pay Later

Breaking up expensive purchases into smaller, easier-to-manage, and interest-free payments may sound too good to be true. And while it’s incredibly convenient, there are drawbacks to using buy now, pay later services. Here’s what you should know before you do...

There are Fees

Because buy now, pay later is a type of loan, it comes with repayment terms. These repayment terms can vary widely depending on the particular servicer. Some services do charge interest and all of them will charge fees if you miss a payment. Just as missing credit card payments can quickly get you into a sticky financial situation, missing a BNPL payment can similarly hurt your wallet and credit score. Late fees and returned payment fees vary from provider to provider but they can be steep and end up increasing the cost of your purchase significantly. Always read the fine print before signing up for a BNPL service to know the terms and fees associated with it.

It Could Hurt Your Credit Score

Similar to a loan, if you default on your BNPL payment plan, the provider can send a debt collection agency to collect payment, report your default information to credit bureaus, and keep you from using their services in the future. These are real risks that can land you in hot financial water, so consider them carefully before signing up for buy now, pay later.

You Can’t Use a Prepaid Card

When using the majority of BNPL services, you won’t be able to use your KOHO card at checkout. It makes sense, given that the card could be used up by the time the provider attempts to charge future payments. Instead, you’ll need to sign up with a valid credit or debit card, or another form of accepted payment.

It’s Easy to Overspend

We can’t talk about overspending with BNPL without discussing fashion, as these retailers were some of the first to implement buy now, pay later services. But if you have to pay in installments for a new sweater or pair of shoes, the odds are good that you shouldn’t be buying it in the first place. By using a BNPL service, you’ll be paying for that sweater or pair of shoes for months to come. Only you can answer the question, is it really worth it?

It’s crucial to be aware of the psychological impact of these services. While convenient, they dilute the necessary pain that comes from parting with our dollars, making it all too easy to spend more than we intend. According to a survey conducted by Lending Tree, ​​69% of people who have used buy now, pay later did so to buy a designer item, and a third of these people have used BNPL to buy designer items multiple times.

Using this tool in this way can lead to lifestyle creep, a sunk budget, and debt, all of which are hard to undo.

It Encourages Impulse Purchases

Perhaps the biggest danger of using buy now, pay later is that it reduces the initial impact of any purchase on our wallet, which makes it easier to say yes to anything we want to buy. We all know this too well. If we fall in love with a t-shirt and it’s only $20, we’re far more likely to walk out of the store having purchased it than if it was $80. The same is true if we see we can buy a $400 piece of workout equipment for only $100 today. The overall cost, however, doesn’t change. In fact, if you can’t afford the $400 exercise bike, it will end up costing you more when you can’t make the payments or when they get charged to your credit card and accrue interest.

You can overcome this psychological battle by allowing time between when you first want to make the purchase and when you actually check out. This is one of the best tactics to avoid impulse shopping and ensure you truly need or want the item in question and that you can afford it.

Proceed with Caution

If you choose to use buy now, pay later, it’s important to keep it at an arm’s length. While it can be a useful tool to budget for larger purchases that you actually need to make, it can be a slippery slope when it comes to general shopping online. Avoid using BNPL services for impulse purchases or anything not factored into your budget and you’ll be able to stay on the straight and narrow financial path.