Last updated August 2021
Buy Now, Pay Later (BNPL) financing is now a popular way to make purchases online for almost everything: clothing, cosmetics, electronics, furniture, home appliances, exercise equipment—even airplane tickets and expensive vacations.
With BNPL, you get the product or booking confirmation right away and spread out its costs over a series of equal payments—often with no interest. Some retailers and credit cards are offering their own programs, but most partner with third-party financing companies, such as Affirm, Afterpay, FuturePay, Klarna, PayPal, Quadpay, Sezzle, Splitit, and Uplift.
BNPL is marketed as a smarter, more consumer-friendly way to pay. While using these plans can improve your cash flow, these point-of-sale loans can lure you into buying things you can’t afford. In a survey of consumers in December 2020 by Cardify, participants reported they spent anywhere from 10 to 40 percent more when they chose BNPL options, rather than paying with credit cards.
Here’s a typical BNPL arrangement: Let’s say you want to buy a MacBook Air for $999 from Apple’s website. Instead of paying the full $999 or charging it to a credit card, you can download Klarna’s app and at checkout you’ll now see it as a payment option. If approved, Klarna will offer you an interest-free loan that requires four payments of $250 every two weeks.
BNPL Helps Close Deals
Retailer and travel-booking websites partner with BNPL companies, or offer their own plans, because they increase sales. As Affirm, one of the big players in the BNPL market, boasts on its website: it “remove[s] price as a barrier, turning browsers into buyers, increasing average order value, and expanding your customer base.”
BNPL companies can offer loans without charging interest because their partners pay them hefty commissions. Sellers are willing to take these monetary hits because they know BNPL encourages customers to make purchases they otherwise might reconsider if they had to pay in full right away. Given the explosion of BNPL, it’s obviously working. Retail purchases made with a BNPL option jumped 166 percent in March 2021 from a year earlier, according to Adobe Analytics.
What’s worrisome is that most consumers who sign up for these plans don’t really know how they work. A survey by The Ascent, a service of investment site Motley Fool, found that fewer than half (43 percent) of the 1,800 adults who said they had used a BNPL service completely understood the terms and conditions.
The Nuts & Bolts of BNPL
While some retailers offer the BNPL option to all shoppers at checkout, with others you won’t see it unless you first install their partners’ mobile app or browser extension, or shop through the BNPL service’s website. For example, Best Buy and Vrbo don’t present online shoppers with BNPL options at checkout unless they’ve signed up with Affirm, their BNPL partner. These apps can also be used at brick-and-mortar stores when shopping at an affiliated retailer.
BNPL financing differs from paying with a credit card in three significant ways: The payments are the same amount each month; you know upfront how many payments it takes to pay off the balance; and the balance never grows.
For merchandise, BNPL loans are typically four to six weeks and interest free, but with some companies there may be late fees: $10 per payment with Sezzle; up to $21 per purchase with Quadpay; and up to $38 per payment with FuturePay.
For travel, BNPL loans have longer payback terms (typically three months to a year), and in most cases you will be charged interest—the APR is determined at checkout based on your risk profile. While the interest rate is fixed and will not go up during the life of the loan, it’s often significantly higher than what you’d pay with a credit card.
Here’s a look at a few popular BNPL services:
- Affirm: Pick a payment schedule—from a few weeks to 48 months—and see the interest rate offered and what your monthly payments would be. Interest rates range from zero to 30 percent—as high as someone with poor credit might pay on a traditional credit card. Affirm promises that it won’t charge “late fees or penalties of any kind, ever.”
- Klarna: You pay the full purchase price in four interest-free installments on your credit or debit card. The first installment is paid at purchase; the next three are automatically charged to your card every two weeks. A late fee of up to $7 will be charged if a payment is not made on time.
- PayPal: Its “Pay In 4” option is a four-week installment program that lets you split a purchase of between $30 and $600 into four equal payments, paid every two weeks. There’s no interest and no fees.
- Uplift: Dozens of airlines, cruise lines, resorts, and other travel brands have partnered with Uplift to offer BNPL financing. In many cases, it lends with zero down and up to 11 months to pay, but for most bookings you’ll pay interest.
Some big credit card companies—including American Express, Citigroup, and JPMorgan Chase—now also offer the option to pay off large purchases in installments. There may be a fee, but the interest charges are often lower than the regular rate you’d pay.
BNPL for Travel Works Differently
Consumers introduced to BNPL from buying merchandise might assume all “pay later” plans are interest- and fee-free. Not so. As we’ve already noted, most lenders affiliated with travel products charge interest rates that can be higher than the APRs most credit cards give customers with good credit.
The book-now-and-pay-for-your-trip-over-time option is now offered by domestic and foreign airlines, cruise lines, online travel agencies (such as Expedia, Kayak, and Priceline), hotels, and even Airbnb and Vrbo. With travel purchases, BNPL financing usually runs for a longer term—from a few months to a year or so, in some cases.
For example, we priced a flight on United Airlines costing $2,506. At checkout, we were given the option to use Uplift: Book for no money down, and pay $246 a month for 11 months at 15 percent APR. But there was this disclaimer: “Actual terms are based on your credit score and other factors and may vary.” If our loan was approved, the interest rate could be significantly higher, based on a credit check. Consumers with poor credit scores might pay an APR as high as 36 percent.
What’s the Catch?
BNPL plans certainly can help with cash flow, and they’re a simple workaround for those who don’t qualify for a credit card; approval for a BNPL installment plan is usually easier to get. As with all financing options, it’s important to consider why you want the loan and read the fine print before signing up.
Unlike credit card companies, BNPL services do not report positive payment history to the credit bureaus. So paying this way won’t help you build credit. On the other hand, some BNPL companies may report late or missed payments, which will have negative consequences. For that reason, you might want to sign up for autopay.
“Consider how borrowing will impact your overall financial situation, and why your overall financial situation may be impacting your borrowing options,” cautioned Bruce McClary, senior vice president for communications at the National Foundation for Credit Counseling. “Is this a good time, and is there a good reason to go into debt for this purchase?”
Using a BNPL service could make it more challenging to get help if you want to cancel a purchase, or are not satisfied with the merchandise you received. There’s now a third party, the BNPL service, between you and the retailer. With travel, it’s especially important to check your cancelation rights. Life happens and plans change. Using BNPL financing adds another layer of complexity should you need to change your vacation dates due to sickness, weather, or a COVID-19 outbreak at your destination. Even if you get a full refund, you may be stuck paying some of the interest on the loan.
BNPL services do not provide the same legal protections—especially against fraud—as you get when you pay with a credit card. So if something goes wrong with the purchase—such as damaged or defective merchandise—you’re dealing with the lender, not the retailer.
Checkbook often recommends paying with a credit card (when possible) because if there’s a problem after the sale, federal law and credit card company policies allow you to dispute a transaction. In our experience, these “chargeback” requests are overwhelmingly approved. BNPL companies may not be as motivated to make you happy.
Beware the Spending Trap
We often warn readers about how retailers manipulate consumers to buy more and buy now—fake sales, hidden fees, misleading scarcity warnings—and now “pay later” offers.
Consumers are typically more protective of their savings than they are their future earnings. For some reason, spending money we’ll earn down the road seems less painful than spending what’s sitting in our bank accounts. BNPL takes advantage of that psychology.
Another reason BNPL is so successful: Most Americans have accumulated thousands of dollars in credit card debt. By offering a different way to pay, some people feel it’s OK to spend, since they’re not adding debt to their already-maxed-out credit cards.
Some big credit card companies now offer the option to pay off purchases of more than $100 in installments. Don’t assume these deals come without penalties: With “My Chase Plan” from Chase Bank and “Plan It” from American Express, there’s no interest but there is a fixed monthly fee. Citibank’s “Citi Flex Pay” is just the opposite: interest, but no fees.
Before taking on more debt of any kind, consider the long-term consequences. The smart move is to save up enough to be able to afford the purchase.
That said, BNPL financing may make sense if you’re offered zero percent interest, and you can afford to make the purchase but simply want to spread out the payments. It could also be a good option to deal with an emergency that requires travel when you don’t have the money to pay for the trip.
Not All “Pay Later” Offers Are What They Seem
Many online retailers that offer “pay later” at checkout are just steering customers to sign up for affiliated credit cards. Apple, for example, pushes interest-free financing at its online store, but you must apply for and get approved for its Apple Card, a credit card. You won’t pay interest on purchases made with that card from Apple (if you keep up with your monthly payments), but Apple’s overall strategy is to get you to use the card for other purchases.
Similarly, shop for a flight on American Airlines’ website and at checkout you’ll get offered a “fly now, pay later” option with no interest for six months. Like with Apple, this is just a way the airline pushes customers to sign up for its affiliated credit cards. To get the six-month free financing, you must apply for and get approved for a credit card, and charge the purchase to that card.
Do Your Homework
Since each BNPL service is different, carefully evaluate any BNPL loans before agreeing to pay this way. Consider:
- Can I make the payments? If you’re already in debt or your income drops, do you really need an extra bill?
- What’s the cost of the loan? How does that interest rate compare to other options, such as your credit card? While some BNPL financing is interest-free, interest rates can be higher than with most credit cards, especially on travel purchases.
- What happens if I miss a payment? While some BNPL services don’t have late payment fees, others do. Will a late payment be reported to the credit bureaus? It could be, and that will damage your credit scores.
- How does this compare to other options? Do you have a rewards credit card? If you can pay off the bill in full when it arrives, you may be better off going that route. Taking an expensive cruise or need to buy a pricey computer or sectional? Some retailers and travel providers will also let you pay in monthly installments interest-free—just watch out for deferred interest come-ons that can be costly should you miss a payment or pay late.
- Shop around for the best price. Our researchers almost always find big price differences for the exact same merchandise and services. Don’t let financing offers dissuade you from finding the best deals—or persuade you to spend more than you can comfortably afford.
“For some people the idea of fixed payments is very appealing, but think about the full picture. Don’t buy something that you can’t afford simply because the store is trying to incentivize you to spend money,” cautioned Ted Rossman, senior industry analyst at CreditCards.com.
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.