Short Answer: “Buy Now, Pay Later” tools like Klarna and Afterpay work if you’re in a pinch and are worth considering when it comes to emergency preparedness.

If you’ve made an online purchase lately, you might’ve noticed the many “Buy Now, Pay Later” options beckoning you at check out. Tools like Afterpay, Klarna, Affirm, Zip, Humm, LatitutePay, and many more offer purchases in installments, without interest.

“Buy Now, Pay Later” services can be a tool in your belt but consider proceeding with caution. Think about it like a day at the beach—if there’s a high rip tide warning, you’re unlikely to go out deep in the water. Better to stay ankle deep and safe than end up in over your head. You can go in but proceed with caution.

The appeal of breaking down a large purchase into smaller installments is enticing, but how does Afterpay work, and how do these services impact finances?

The Rise of “Buy Now, Pay Later”

The idea of “Buy Now, Pay Later” (BNPL) has been around almost as long as money itself. From paying in installments or point of sale installment loans to layaway and zero-interest credit cards, BNPL is ushering these transactions into the 2020s with easy-to-use technology that secures a payment plan for customers in a few simple taps at check out.

Through integrating installment plans with technology, BNPL has experienced a meteoric rise. Plus, with the added benefit of low to no interest rates on purchases, adoption has been steep. A 2021 survey revealed that 39% of online shoppers had tried the service.

How Does Afterpay Work?

Nearly half of all online shoppers have used BNPL, but how does Afterpay work? Most BNPL programs follow an almost identical process.

• Participating BNPL shops prompt you to use its service (Klarna, Affirm, Afterpay, etc.) at checkout.
• If you’re successfully approved for the service, you make a small down payment on the product, then agree to pay the rest in a series of monthly payments. The downpayment is often 25% of the total price.
• For more expensive purchases (think in the $1,000s), BNPL typically offers a 30-day interest-free period, then financing with an APR between 0 and 30%. After the interest-free period, you could be charged upwards of 30% interest on the payments. This is when reading the fine print and disclosures is essential.
• Once you enter your banking information, the BNPL provider can make automatic charges to your account over the life of the payment. Similarly, you can manually make monthly payments via the app or online.

In many instances, getting approved for BNPL is easier for people with low or no credit scores, as it only uses a soft credit check. The approval process takes a matter of moments. However, it’s important to read over the terms of the agreement, which can include information on rates, late fees, and other possible fees.

Does Afterpay Build Credit?

If you’re hoping on-time payments on your Affirm or Afterpay installments will help build credit, similar to a credit card, then you may be out of luck.

On-time and completed BNPL purchases won’t have an impact on your credit. However, late or missed BNPL payments are reported to the credit bureaus and can negatively impact your credit score, and that’s on top of the fee the BNPL provider will charge.

Pros and Cons of “Buy Now, Pay Later”

Now that we’ve answered the question of how Afterpay works, let’s explore its benefits and drawbacks. Klarna, Affirm, Afterpay, and many competitors seem easy and enticing. However, their positives do come with a fair share of negatives.

Benefits

• Simple approval process. Unlike getting approved for a credit card, BNPL takes a few clicks, making it easy and fast to figure out an installment plan. 
• Soft credit check. The approval process comes with a soft credit check, which won’t impact your credit score like a hard credit check would. 
• Doesn’t require good credit. If you’re a credit newbie or have a low credit score, getting approved for a BNPL program could be easier than a credit card.
• Breaking a big purchase into smaller installments. If you need to make a big purchase, like furniture or electronics, breaking it down into smaller installments can make affording it easier.
• Low or no interest. Most BNPL plans offer low or no interest at checkout if the purchase is small enough. However, check the service terms and conditions, as interest rates may be subject to change at any time.

Drawbacks

• Doesn’t boost your credit score. While it’s easy to get approved, BNPL programs don’t help your credit score, even if you make on-time or early payments.
  
• Can harm credit score. Missed and late payments can hurt your credit score, which can be hard for those with already low credit scores.
  
• Returns are complicated. If you choose to return an item purchased through a BNPL plan, you may be required to pay out the duration of the installments before receiving a refund. Check the fine print on a purchase, or reserve BNPL for items you know you want.
  
• Fees for late or missed payments. BNPL can come with fees if you miss or make a late payment on a purchase.
  
• Leads to overspending. A survey showed 55% of shoppers who used BNPL admitted spending more than they usually would with other payment methods.  

When Should I Use “Buy Now, Pay Later” Tools?

Traditional budgeting says, “only purchase what you already have the money for.” BNPL turns that idea on its head, asking customers to buy, then plug monthly installments into their budget. 

For those with a firm grasp on how their money comes and goes, purchasing an item using BNPL may be a breeze. What’s $25 a month for a couple of months?

However, the risk could come with taking on multiple BNPL payments at once. As BNPL shoppers are more likely to overpay with this method, you could end up with an unmanageable amount of monthly payments, leading to an overextended budget, stress, and late fees.

Because BNPL can snowball, it may be best used when:

• You already have the money set aside but don’t want to spend it all at once
• Have a budget in place accounting for BNPL payments

Afterpay works for a select number of scenarios. Buy Now, Pay Later may be tempting, but it’s worth asking, “Why am I using this?” If it’s to spend more without a plan in place, even interest-free payments could spell issues down the line. 

Extra Credit

How are services like Klarna, Afterpay, and Affirm different from loans?

BNPL plans aren’t traditional loans and don’t require a hard credit inquiry. However, BNPL plans can come with interest rates, similar to conventional loans. Read the fine print to understand the terms of your BNPL plan.

How do these “Buy Now, Pay Later” tools make money if they don’t charge interest?

BNPL services charge transaction fees to the retailer of between 2 to 5%. If you’re shopping at a small business, using BNPL might have an impact on their bottom line. 

How is “Buy Now, Pay Later” different from a credit card?

Credit cards are a revolving line of credit, which means as you pay the balance down, you can charge more. BNPL plans are one-time loans, and once they’re paid down, you can’t get credit back.