How do buy now, pay later (BNPL) apps work?
Buy now, pay later apps let you make purchases online and pay them off over time in weekly, bi-weekly, or monthly installments. BNPL is sometimes available as a checkout option at your favorite retailer's website -- just click the "Buy with Klarna/Affirm/Afterpay" button to use. Some BNPL companies also offer standalone apps you can download from the App Store.
These BNPL checkout options charge you interest or flat fees or late payments for failing to pay according to the plan. You can typically avoid fees by paying off your balance on schedule.
Popular BNPL apps include PayPal Credit/Pay in 4, Afterpay, Affirm, and Klarna. You'll find them at the checkout pages of many online retailers. A typical BNPL interest-free offer might break a purchase into four equal installments, the first one paid at checkout and the other three paid every two weeks.
Example: Say you're buying a lamp for $200 (it's a really nice lamp). You click the "cart" icon to start the purchase process. Beneath the option to pay with a credit card, you spot a "Pay with Klarna" button. If you click the button and fill out the relevant fields, you could be approved to pay for the lamp in four installments. You'd pay $50 upfront, and you'd get shipped the lamp right away. You'd pay another $50 every two weeks until you hit $200. After you pay off the lamp in full, you don't owe anything else.
But there's a catch: if you make a single late payment, or you fail to pay off the $200 before the six-weeks mark, you're either charged a flat late fee or an interest fee -- possibly both. That's why it's important to make timely payments before the interest-free period ends.
Does buy now, pay later affect my credit score?
BNPL will rarely improve your credit, but it can hurt it.
Most BNPL apps don't do a hard pull on your credit report, and many of them don't report on-time payments to the credit bureaus. That means your approvals and timely payments are invisible to the credit bureaus -- they won't show up on your credit report.
What about late payments? Some BNPL apps do report late payments. Also, if you default on your payments, most BNPL apps can terminate your account and demand your remaining balance be paid in full immediately. If you fail to pay, your debt can be sent to collections, which can seriously damage your credit score.
You can think of BNPL apps like nosy tattletales. When you do something right, they stay silent. But when you mess up, they run to the teacher (aka credit bureaus) and spill the beans, getting you in trouble. The lack of opportunity to build credit might be a downside for some, but others -- especially folks with bad credit -- will appreciate BNPL apps' more lenient credit approval.
Is it a good idea to use a BNPL app to pay for online purchases?
Sometimes. In most cases, BNPL apps offer good deals -- as long as you pay off your balance on time. There are definitely some pitfalls to be aware of when using BNPL apps. Overall, though, they've introduced a flexible and convenient way to finance your online shopping.
Pros of BNPL apps
No hard credit check: Most BNPL apps won't perform a hard credit check when you open an account. Too many of these is bad for your credit score. Some BNPL apps do perform a soft pull on your credit, but this doesn't impact your score. It's typically easier to get approved for a BNPL account than it is to be approved for a credit card.
Interest-free periods: If you take advantage of an interest-free offer and pay off your balance on time, BNPL can be a good deal. You'll be able to receive your purchase right away and pay for it over time -- and you won't have to pay any fees.
Convenient and fast: The convenience of BNPL apps is undeniable. They don't require any separate applications or processing times. The payment options are built-in with many online retailers, so it's almost as easy as entering your credit card info.
Cons of BNPL apps
Late fees: If you forget to make a payment or don't have enough money in your linked bank account, you'll likely be charged late fees. Many are reasonable flat-rate fees in line with those assessed by credit cards, but these fees can add up over time.
High interest rates: If you fail to make scheduled and timely payments, some BNPL apps will begin charging you interest fees. BNPL interest rates can be much worse than credit card interest rates.
Small credit limits: Most BNPL apps offer lower credit limits than credit cards, meaning you can only make smaller purchases. That being said, it's not a great idea to buy big purchases on credit anyway, as interest fees get expensive and could put you in debt for years.
Don't build credit: BNPL apps don't build your credit, though they can hurt it. If you'd like to build a credit history with payments, consider checking out with a credit card instead.
The most popular BNPL apps and how they work
According to the BNPL study done by Motley Fool Money, the most commonly used BNPL apps amongst respondents in the U.S. are PayPal Credit (formerly Bill Me Later), Afterpay, Affirm, and Klarna. Here's how each one works.
PayPal Credit/Pay in 4
You can use PayPal's "Pay in 4" service anywhere that accepts PayPal, which makes this BNPL available at most major online retailers. This is a credit line, similar to a credit card, so you can use it over and over again.
You'll pay no interest on purchases of $99 or more as long as you pay them off in full within six months. If you don't, you'll be in for a costly surprise. The ongoing APR is fairly high and will depend on current rates at the time you use the service.
PayPal Credit uses deferred interest to calculate how much you owe. Deferred interest means that if you don't pay off your balance 100% by the end of the six months, you'll be charged interest as if you haven't paid off anything -- even if you only have a few dollars left to repay.
Afterpay
Afterpay lets you pay for purchases over four interest-free installments. When you pay with Afterpay, you'll be shown the payment agreement, which usually includes an upfront deposit and then future installments paid every two weeks.
This BNPL app does not charge any interest at all, even if you fail to make your payments on time. However, you can be charged late fees if you miss payments, which can also damage your credit. If you default, Afterpay can charge the full amount owed to your linked card.
Affirm
Affirm lets you adjust your flexible payment plan to fit your schedule. You can pay over weeks or months. Affirm doesn't charge late fees, but it may charge interest, especially if you choose to stretch out your payment plan.
Before you make a purchase, Affirm shows you how much interest you'd pay. Interest rates range from 0% to 36%, depending on your creditworthiness and payment plan. If your plan includes an APY above 0%, you may begin accruing interest right away.
Affirm buy now, pay later can impact your credit positively and negatively -- making on-time payments can help you build credit, while defaulting can damage it. Creating an Affirm account does not affect your credit score, though.
Klarna
Klarna spreads your purchase out across four interest-free installments paid every two weeks. The first installment will be charged at checkout. As long as you follow the payment schedule, you won't pay any fees or interest charges.
However, if you miss a payment, Klarna will charge you a late fee and possibly a returned payment fee. If you default on your payments, Klarna can charge the full amount to your card immediately and close your account. This can also damage your credit.
Should I use a BNPL app?
That depends. The safest thing is to pay for purchases upfront. But if you do need to finance a purchase flexibly, BNPL can be a good option.
Paying in full is the only way to be sure you'll avoid late fees and interest charges. If you can't afford something upfront, it's wise to put money into a savings account each week or month until you have enough to buy the item.
BNPL's short repayment periods and interest-free offers can save you money on interest and help you avoid falling into debt. Be sure you can afford the agreed-upon payment schedule. That way, your bank account remains healthy, and so does your credit score.
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