What is buy now, pay later?
Remember putting things on layaway? Maybe not — the practice that became popular during the Great Depression has mostly gone out of style as more shoppers opt for credit cards (and rack up credit card debt). In 2006, Walmart ended its layaway program after 44 years.
Layaway allows cash-strapped shoppers to place an item on hold while they make payments, then bring it home once they’ve paid in full. But with BNPL, you can bring the item home immediately.
Buy Now, Pay Later websites
To buy now and pay later, you first need to create an account with a third party. You have a few choices, and some of the more known ones include:
The typical list of criteria for many BNPL sites is short: be at least 18 years old and have a valid debit or credit card to link to the account. Some companies will run a credit check to get a look at your basic financial history before they determine how much you should be allowed to finance.
Once you’re signed up, you can buy now and pay later at any of the stores associated with that service.
In most cases, these installment plans are interest-free. You’ll pay extra only if you can’t make the payments on time.
Who’s using buy now, pay later plans?
Given the ongoing retail apocalypse of massive store closings, merchants are desperate for anything that will attract more customers.
According to Juniper Research, BNPL payments are expected to account for nearly a quarter of all global ecommerce transactions by 2026.
BNPL is becoming an increasingly common part of the everyday online shopping experience, especially for young shoppers. More than 45 million Americans aged 14 and older will use buy now, pay later BNPL services this year, according to Insider Intelligence. Over 80% of those users are forecasted to be of the Gen Z and millennial generations.
Benefits of BNPL
In some cases, BNPL can prove to be a worthwhile option to those that need it.
Fitting a purchase into your budget: Spacing out your payments can alleviate the strain on your bank account. Some BNPL companies run on a biweekly payment schedule, which could line up well with your paycheck. Ideally, you should try to save up for a purchase, but BNPL could help you snag the perfect outfit for a job interview if you’re still a week from pay day.
Flexibility without a credit card: Though you can get certain credit cards without a stellar credit score, some of those cards require a security deposit, which you might not be able to afford. Without a credit card, BNPL may be your only option for certain purchases.
Skipping credit card fees: If you’re already paying high interest on your credit card balance, you should consider first. Otherwise, these services can help you make a purchase without adding to your credit card balance, which can have APRs between 14% and 24%. But remember: This only works if you can stay on top of your repayment plan.
Earning rewards: Some BNPL companies offer exclusive discounts and features. Klarna, for example, will notify you if an item you’re watching drops in price. Other companies are experimenting with loyalty programs, where shoppers can earn rewards by using the service.
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Downsides of BNPL
The BNPL industry’s rapid growth is part of the reason it caught the eye of the Consumer Financial Protection Bureau (CFPB). The financial watchdog launched an inquiry in December that would investigate the services' fraud risks, practices around data collection and what consumer protection laws should apply to the industry.
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately, too,” CFPB Director Rohit Chopra said in a statement at the time.
Like other forms of credit, BNPL bills can come back to haunt you if you don’t plan ahead.
Expensive late fees: If you can’t make your installments, the fees can start to add up. The amount will depend on the service. Afterpay will charge you the lesser of 25% of the purchase price or $24. Klarna can charge you a total of $21 after three consecutive late payments.
High interest rates: Not all BNPL companies offer a zero interest rate. Affirm doesn’t charge late fees but can charge interest of up to 30% depending on the plan — much higher than the average credit card interest rate of 19.9%. And if your BNPL plan is linked to your credit card, payments will simply add to your card balance at a high APR.
Spending money you don’t have: These services, much like credit cards, can encourage impulse buying. If you can’t afford those fancy shoes now, will things really be different in the weeks to come?
Hurting your credit score: Some of these companies will do hard credit checks, which can temporarily ding your credit score. They also might report your missed or late payments to the credit bureaus, further weakening your score. And to top it off, these services may not help you build your score if regular payment activity isn’t reported to the bureaus.
More: Get your free credit score from Credit Sesame
The future of BNPL
According to Grand View Research, the global BNPL market size is expected to reach almost $40 billion by 2030.
And rapid growth doesn’t come without its fair share of hurdles.
Klarna recently announced it would lay off 10% of its workforce, about 700 people. The company’s co-founder and CEO Sebastian Siemiatkowski cited the war in Ukraine, “a shift in consumer sentiment, a steep increase in inflation, a highly volatile stock market and a likely recession” as the reason for the cuts.
Competition between providers — especially with Apple entering the ring — is fierce. Apple Pay Later will be offered by millions of retailers that already accept Apple Pay.
In response to the announcement, shares of BNPL platform Affirm, which is partnered with Amazon, sunk 17% last week.
Despite Klarna’s current predicament, Siemiatkowski defended his company’s business model while calling Apple’s move an “amazing” thing for consumers.
“This is a better model for consumers than the traditional one of credit cards. Klarna is a more agile lender compared to banks and actually extremely recession-proof,” he told CNBC last week.
Inflation means borrowing costs are up for providers, too, which adds to the shifting and changing landscape to which companies will be forced to adapt.
Is BNPL worth it?
The most important factor for consumers is to recognize BNPL as a borrowing tool like any other, and to act accordingly. Even with more regulation seemingly on the horizon, experts are worried about the amount of debt that can come from consumers’ reliance on BNPL plans.
With big players set to enter the field and so many BNPL options readily available, Colleen McCreary, consumer financial advocate at Credit Karma, says consumers should beware of how much debt they accumulate.
“Like any loan product, it can be a dangerous path for those who do not borrow responsibly,” McCreary said. “We’re now seeing people use debt to pay off debt, which can be a vicious cycle.”
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