What Is Buy Now, Pay Later and Is It a Good Idea?

“Buy now, pay later” is an installment loan that allows a buyer to purchase something online or in-store right and pay for it over time. The installment loan is typically interest-free when paid off over a short period of time or may have added interest and fees if spread out over a longer period of time.

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What We'll Cover

  • What Buy Now, Pay Later is and how it works
  • The risks and advantages of Buy Now, Pay Later
  • Comparing Buy Now, Pay Later to credit cards
  • When it makes sense to use Buy Now, Pay Later

If you’ve purchased anything online within the past year, chances are you’ve seen the Buy Now, Pay Later (BNPL) option or maybe have even used it. In fact, a recent report discovered that nearly 50% of consumers have used BNPL at checkout, with 75% of those being Gen Z or Millennials.

Now in 2023, nearly 360 million people are using Buy Now, Pay Later across the globe, and that number is expected to grow to more than 900 million users within the next five years!

BNPL might be growing in popularity for both retailers and consumers, but is it a good idea? Here’s what you need to know.


What is Buy Now, Pay Later?

Just like the name suggests, “Buy Now, Pay Later” allows the buyer to purchase something online or in-store right now, and then pay for it over time using an installment loan.

The installment loan is typically an interest-free loan when paid off over a short period of time or it may have added interest and fees if spread out over a longer period of time.

The consumer can either go directly through the BNPL company to make a purchase or they can go through one of many thousands of retailers that have partnered with a BNPL service.

For example, Amazon shoppers can check out inside Amazon using Affirm and Wayfair shoppers can check out from the Wayfair shopping cart using Klarna.


How Does Buy Now, Pay Later Work?

Buy Now, Pay Later is quite simple.

Step 1: Shop. A consumer goes shopping online or in the store. At checkout, the consumer has an option to “Buy Now, Pay Later.”

Step 2: Choose payment terms. After selecting Buy Now, Pay Later as the payment method, the consumer is then prompted to choose payment terms. Here are a couple common options:

  • Pay in 4: Make 4 interest-free bi-weekly payments and pay zero interest.
  • Monthly payments: Typically accrue interest at a rate between 0% to 36% APR based on the consumer’s credit.

Step 3: Make payments. Consumers can set up automatic payments or make manual payments.


When Is It Best To Use Buy Now, Pay Later?

A good way to use Buy Now, Pay Later to your advantage is to use it for big ticket items you know you can pay off within the zero-percent payment term.

For example, maybe your hot water heater went out and you have the option of using a high interest rate credit card or a BNPL service at zero-percent interest in 4 installment payments. When choosing the 4-payment option, you can replace your hot water heater immediately while also taking advantage of a short-term interest-free installment loan.


What are the Risks of Buy Now, Pay Later?

Be aware of the following risks before choosing BNPL at checkout.

Risk #1: Overspending

Afterpay advertises that shoppers who use their services will shop 50% more than they normally would and will increase their order value by more than 40%! An interest-free installment loan may sound great, but instead of looking at how much you’ll owe per month, ask yourself if you’re willing to spend the total amount of the item you’re purchasing.

Risk #2: High Fees and Interest

Of course when you pay off the balance in 4 bi-weekly payments, you won’t pay interest. However, one study found that 46% of BNPL users anticipate making late payments and almost a third of BNPL users made a late payment in 2022. When this happens, shoppers are paying upwards of 30% APR and up to 25% of the purchased value in additional late fees!

Risk #3: Making a Return is Difficult

One of the reasons Buy Now, Pay Later continues to grow so quickly is because of how easy it is to get an installment loan at checkout. As easy as it is to make a purchase with BNPL, the hard part is making a return.

For example, Affirm’s policy is the shopper must apply for a refund from the store they purchased from, then continue to make payments on the item until the return is approved through the store. In addition, there may be balance due or a refund applied depending on when the return was made and how far into the installment plan you were when the return was started.

Pros of Buy Now, Pay Later

  • Make larger purchases more affordable for shoppers
  • Extremely simple and convenient
  • Can often be interest-free loans
  • Higher credit score not necessary to qualify
  • Already integrated with many online retailers
  • Credit card companies now offer BNPL with small fees

Cons of Buy Now, Pay Later

  • Often results in spending more than normal
  • Very fast approval (seconds)
  • No rewards or cash back earned on your purchases
  • Late fees can occur
  • On-time payments do not help you build credit
  • Missed payments can hurt your credit
  • You may not be able to return a purchase made with BNPL

Buy Now, Pay Later vs. Credit Cards

Now that we have an understanding of how Buy Now, Pay Later works, let’s compare this service to a credit card.

No credit check with BNPL

Unlike credit cards that do require a “hard pull” on your credit when you apply, a BNPL service does not. If you’re worried about your credit score becoming negatively affected with a credit card application, a BNPL option may be a better choice for you.

No rewards with BNPL

When you use your credit cards and pay them off in full each month, you may be benefiting from free cash-back, reward points, or miles. With a BNPL service, you won’t earn any type of rewards.


BNPL allows you to instantly gain approval and start the Buy Now, Pay Later process. On the other hand, a credit card usually takes a few days to apply and then actually receive your card in the mail. Keep in mind, some credit card companies will send you an electronic card via email to use right after approval.

One payment for one purchase

BNPL creates an installment loan based on the single purchase. This makes it simple for the borrower to focus on paying down the purchase amount within the terms of the installment loan. Credit cards on the other hand can have multiple purchases and expenses all lumped together, making it more difficult to manage and pay off on time.

Your credit card may have BNPL built in

With the increase in popularity over the past few years with BNPL, many credit card companies have jumped on the bandwagon. However, the process is a little different than a typical BNPL service. The credit card option comes after the purchase and the payment plan terms will charge interest if the balance isn’t paid within the credit card’s billing cycle.

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Is There a Better Alternative to Buy Now, Pay Later?

Buy Now, Pay Later is debt. Anytime you borrow money (even at 0% APR), it’s still debt.

Your best option is to delay the instant gratification and instead save up and pay cash for what you’re purchasing. Of course this may seem a little old fashioned, but the truth is you can’t get yourself into debt when you pay with cash or a debit card.

Another option is to use a credit card to make the purchase and then pay the balance off before the billing cycle ends. When doing this, not only do you take advantage of any cashback rewards or points you may earn, but you also build a pattern of on-time payments that will improve your overall credit score.

Key Takeaways

  • “Buy Now, Pay Later” allows the buyer to purchase something online or in-store right now, and pay for it over time using an installment loan.
  • A good way to use Buy Now, Pay Later to your advantage is to use it for big ticket items you know you can pay off within the zero-percent payment term.
  • Risks of Buy Now, Pay Later include overspending, high interest and late-payment fees, and difficulty making returns.
  • BNPL may be more convenient than using your credit card, but does not come with cash back or other rewards.

If you decide to go with Buy Now, Pay Later, remember to ask yourself if you’re willing to make this purchase without BNPL and then determine what happens if you need to make a purchase. Lastly, find out what the interest rate and fees are if you were to have a missed payment.

Chris “Peach” Petrie is the founder of Money Peach. Money Peach partnered with OneAZ to provide free financial education to members across the state. To learn more about OneAZ’s partnership with Money Peach, click here.

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