How Does Buy Now, Pay Later (BNPL) Work? A Guide to the Popular Short-Term Financing Option

Have you ever seen the perfect item online, but your budget just won’t accommodate it right now? That’s the dilemma buy now, pay later (BNPL) solutions were designed to solve. 

They allow you to split purchases into smaller payments instead of making you shell out the whole amount all at one time. If your credit isn’t great, BNPL can be an easy way to get the things you need now and pay for them over time. But you still need to treat it like any other form of financing — not just free money.

Buy Now, Pay Later (BNPL) is a payment option that lets you split a purchase into smaller installments, often with no interest if paid on time.

BNPL can work well if you use it the right way. In this informative and well-written article (ahem), I’ll describe how BNPL operates so you can decide for yourself whether you want to use it.

Understanding BNPL doesn’t require a finance degree. In fact, very few things do. The concept is pretty straightforward, and I’m here to break it down for you.

Using BNPL to Make a Purchase

When you use BNPL at checkout, you agree to split your total purchase into smaller payments over time. Instead of paying the total amount all at once, you can put some money down — often 25% — and pay the remainder over time through installments.

BNPL is typically offered by retailers and finance companies, where it is integrated into the checkout process.

Approval is often immediate, with little or no need for a credit check. That is attractive when you have a poor or limited credit history. Remember, however, that approval does not guarantee affordable payments. Your payments can accumulate rapidly if you have multiple BNPL plans. That’s why you should consider the terms and ensure you can afford the payments before selecting BNPL.

Typical Repayment Structure

Most BNPL plans follow a simple repayment structure, although the terms vary by provider. Typically, your total purchase is divided into payments evenly, such as four payments two weeks apart. Some providers allow for payments each month, possibly for three to 24 months, depending upon the purchase and the loan terms.

One major plus for BNPL is the fact that many plans don’t charge interest — if you make payments on time. This is similar to credit cards, where you don’t pay interest unless you carry a balance past the due date. 

Some BNPL providers charge interest for their longer-term plans, and the rate can compete with or even undercut the usual credit card APR.

Pay close attention to the terms, lest you unknowingly subscribe to a plan that charges interest. Read the fine print before committing yourself to a BNPL agreement.

Late Fees and Penalties

BNPL may sound like a simple solution for managing your finances, but failing to pay can have expensive consequences. Most BNPL providers assess late payment fees. These fees may be fixed, or the provider may charge you a percentage of your skipped payment. 

Even when a provider doesn’t impose a penalty for being late, failing to pay can cause you to lose access to future BNPL opportunities.

Overdue payments can also negatively affect your credit score. After 30 days, most providers will report you to at least one of the major credit bureaus. Not paying can lower your score and make you less likely to qualify for loans or credit cards when you need them. 

If you can’t pay, notify the provider — some will grant extensions for hardship cases.

Let’s consider the yin and yang of BNPL. It can be a great fit for your needs, but it does have a dark side.

Pros

• Makes Purchases More Convenient: BNPL enables you to make a purchase you’d otherwise need to defer. Instead of paying all at once, you can pay over several weeks, or even months. This flexibility can aid budgeting, especially for big-ticket items such as appliances, or for unplanned expenses.
• Potential Interest-Free Payment Plans: Many BNPL plans allow for interest-free payments, possibly less expensive than using a credit card — if you pay your balance by the due date. Unlike loans, BNPL approval is instantaneous and doesn’t necessarily require a hard check against your credit history, making them available even if you have less-than-perfect credit.
• Quick and Easy Approval Process: The application is typically integrated into the checkout process, and approval or denial is essentially immediate. You don’t have to bother with multiple forms, and bank approval is not required. This convenience is one of the reasons why you may prefer to use BNPL online and in-store.

Cons

• Overspending and Debt Accumulation: BNPL can tempt you to spend too much because the initial price appears affordable. Splitting the payments can lure you into purchasing things you don’t need. Payments can also accumulate quickly and strain your budget if you use multiple providers at the same time.
• Fees and Interest for Missed Payments: Overdue payments can incur additional fees, causing your purchase to cost you more than you planned. Some BNPL plans don’t involve interest, while others impose high interest when you fail to make your payments on time. These costs can add up alarmingly if you use BNPL frequently.
• Credit Score Impact: Your credit score may be harmed if you fall behind. Missed payments could also impact your ability to secure loans or credit cards in the future since providers may report delinquent payments to the credit bureaus. Paying on time will not necessarily build your credit since not all providers report a good payment history.

BNPL can work for you, provided you manage it cautiously. If you decide to use it, you need to ensure the payments will fit your budget.

At this point, you’re probably mulling over whether to use BNPL instead of credit cards. Let me help you decide.

Interest Rates and Fees

One large difference between BNPL and credit cards is how they approach interest. Most BNPL plans involve zero-interest payments, provided you pay each installment on time. 

Credit cards accrue interest against any outstanding balances (i.e., balances that you carry into subsequent billing cycles). Credit card APRs for folks with poor credit can reach as high as 36%. 

BNPL may seem better, as the repayment period may be longer than a credit card billing cycle. In other words, you have longer to repay without interest. But remember, some providers make you pay penalties for overdue payments or charge high interest when you fall behind.

Now, credit cards with introductory 0% APR promotions are a different kettle of fish. These may give you up to 18 months to repay interest-free. That’s unbeatable until the promotion ends. Unfortunately, it’s challenging to qualify for these terrific cards if you have poor credit.

Credit cards for bad credit may also have added expenses, such as annual, maintenance, and signup fees. BNPL doesn’t come with those added expenses, so short-term financing is simple. But when you sign up for a BNPL plan that charges interest, the total price tag can be the same as — or even higher than — that of a credit card.

Repayment Flexibility

BNPL requires you to stick to a fixed payment schedule, where you pay set amounts on predetermined dates that are typically automatically withdrawn from your bank account. This can make budgeting easier, but it is less flexible if your financial situation changes. 

Credit cards allow you to pay a smaller amount and carry the balance over the long term, leaving you with greater flexibility.

That flexibility can work against you. Suppose you pay only the minimum amount due on a credit card. In that case, you will accumulate interest payments, and you may find yourself unable to repay your balance. 

BNPL compels you to pay your debt over a specified period, which is something that can work for you if you don’t want to pay interest on long-term debt.

Rewards and Consumer Protections

Credit cards may offer goodies like cash back, travel rewards, and purchase guarantees. These perks can pay for themselves when you make regular use of your card and pay the balance each month. 

BNPL doesn’t offer rewards or added guarantees. Once you make the BNPL purchase, you’re obligated under the payment schedule without the benefit of points or airline miles.

Consumer protections also vary. Credit cards provide stronger fraud protection and the right to resolve disagreements. Your credit card issuer may help you reverse a transaction if you purchase something faulty or don’t receive the goods you bought. 

BNPL providers typically provide less security, and you will find it difficult to dispute the purchase or recover your money when you fall prey to fraud.

Summary Chart

This chart summarizes the two forms of credit. I find these easier to understand — don’t you?

Ultimately, choosing between using credit cards and BNPL is all about your needs. If you need short-term financing and can make your payments when due, you may prefer BNPL. You might find a credit card works better for you if you like flexibility, rewards, and strong consumer protections.

Let’s take a look at the several types of BNPL providers and where you can find their services. It turns out they’re all around us.

Retailers and Online Stores

Many retailers, online and in-store, now offer BNPL when you check out. Large corporations and online marketplaces work together with BNPL providers to give you an alternative to the traditional credit or debit card. 

If you make your purchase online, you may discover providers such as Afterpay, Klarna, or Affirm being offered right on the payments page. Even some physical stores enable you to apply for BNPL, making it easier to split your payments without the need for a credit card.

Because BNPL may be built into the purchasing process, approval is generally swift and simple. In some cases, the provider doesn’t even require a detailed credit history check, making BNPL obtainable even if you have subpar credit. 

The availability depends on the retailer’s relationship with the individual providers, so your chances will vary based on where you shop.

Specialized Providers

Several companies deal only in the business of BNPL, offering installment payments for various transactions. Players like Klarna, Affirm, Afterpay, and Zip dominate the space, each offering their own terms for approval and repayment. 

These providers partner with online platforms and retailers to offer flexible payments for individuals who require short-term financing. 

Each provider is unique. Some will charge you interest for the longer plans, but others deal only in short-term, interest-free payments. Be sure you understand the terms for each provider before you pick a BNPL plan, especially if you are concerned about fees or repayment terms.

Banks and Credit Card Issuers

Traditional banks and credit card issuers have also started releasing their own models for BNPL. In lieu of third parties, the largest financial institutions now make credit terms available to their customers through installment payments. 

For example, some credit card issuers (notably, American Express and Chase) may allow you to make fixed payments over a set time, usually for less interest than traditional revolving credit.

BNPL plans offered through traditional credit issuers tend to have shorter repayment periods. Expect to make a payment every two weeks, rather than once a month.

This type of BNPL solution merges the benefits of traditional repayment schedules and old-style credit. This can be useful even if you carry around a credit card. Bank-offered plans differ from third-party providers in that they may require a credit check, which can impact your credit utilization ratio.

The trick to using BNPL is to avoid getting in over your head. These practical tips should help.

Budget for Installment Payments

Before using BNPL, take a good look at your budget to ensure you can afford the payments. Splitting the purchase into multiple payments can make the cost less overwhelming, but using several BNPL plans simultaneously can quickly add up. 

If you already have many financial commitments, additional payments could bust your budget. Treat BNPL purchase like you would any financial obligation — only buy stuff you can afford.

However, using BNPL can make sense if you incur emergency expenses that you can’t immediately afford. But using BNPL to buy something you don’t need can add financial stress, so think it through first.

Track Your BNPL Payment Plans

It’s easy to fall behind when you make payments to multiple providers. Each one has its own terms and due dates for repayment, so keeping track can prevent you from forgetting payments. 

Captain Obvious recommends you mark the due date on your electronic or paper calendar and set reminders on your phone so you don’t fall behind.

Some BNPL apps also offer features for tracking payments. Alternatively, you can track payments in a spreadsheet, financial software, or a list detailing your outstanding BNPL plans, their due dates, and the amount owed.

Know the Terms and Conditions

Before plunging into a BNPL deal, carefully read the terms to avoid surprise fees and interest payments. I’ve covered that most BNPL deals boast zero interest. However, some will impose extra costs for missed payments or acts of non-compliance. 

Fees for overdue payments differ by provider —  some BNPL deals will incur elevated levels of interest for overdue payments.

Also, check whether the issuer reports payments to at least one of the major credit bureaus. Remember, delinquent payments may count against your credit score, so invest a little time to ensure you know beforehand. 

BNPL is safest when you recognize exactly what you are committing yourself to and are sure you can afford it.

BNPL can be useful for short-term purchases when you don’t have a good credit history, or you don’t like using traditional credit cards. If you use it cautiously, you can repay gradually without building high-interest debts. But the convenience of using BNPL can also lead you to overbuy and overextend your budget unless you rein yourself in.

Before opting for BNPL, ensure you know the repayment terms, the associated fees, and the possible impacts on your credit. Monitor your payments, budget for them, and avoid using BNPL for non-essential purchases. A small amount of planning can avoid turning BNPL into a financial strain.

Remember, BNPL is only one financing option. You can pay for your purchases without emptying your bank account if you use it correctly. Misusing BNPL can increase your financial tension. The solution is knowing when — and how — to make the most of it.