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Buy now, pay later: Is there a catch?

With buy-now, pay-later services, you can make purchases and split the payments into bi-weekly or monthly installments — sometimes without even paying interest

By Credible
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Buy-now, pay-later services allow you to split up your purchases, often with no interest or fees. But is there a catch? (Shutterstock)

Between personal loans and credit cards, you have options for spreading out the cost of a purchase over months, instead of paying in full at the time of sale. "Buy now, pay later" is a relatively recent addition to your payment options. Online retailers and a variety of providers offer buy-now, pay-later services, easily allowing customers to pay for their purchases in regularly scheduled installments. 

Here’s how buy now, pay later works, and whether there’s a catch for using this financing option. 

A personal loan is another way to fund a purchase or large expense. Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.

What is buy now, pay later?

As the name implies, buy-now, pay-later services (also referred to as BNPL) allow you to buy a product now and pay for it in a series of installments over a short period of time. Similar to layaway, consumers can buy items as needed, then split the payment for those purchases evenly over a few weeks or months, sometimes without incurring interest charges. 

These deferred-payment services usually require you to pay for a portion of your purchase up front (25% is typical), with the remaining balance due in a series of installments. You’ll receive your purchase right away — just as if you’d paid in cash — but you’ll need to make payments to satisfy that debt as agreed.

The most popular BNPL providers include Affirm, Afterpay, Klarna, and Zip, though Apple and Paypal also offer their own buy-now, pay-later options. Many online stores and in-person retailers offer BNPL services at checkout, making them easy to use for large and small purchases.  

Until recently, BNPL transactions weren’t reported to any regulatory agencies, such as the three main credit bureaus. However, concerns about accumulating consumer debt have led the Consumer Financial Protection Bureau (CFPB) to launch a market monitoring inquiry urging these companies to begin collecting and reporting certain information. In February 2022, credit-reporting agency Equifax started giving BNPL providers the option to report payments on consumers’ credit reports. 

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Should you use buy now, pay later to fund your purchases?

Chances are high that you’ll be offered the option of buy now, pay later when making a purchase with an online merchant or even checking out at a store. But are BNPL services the right choice for funding your next purchase? Consider their benefits and drawbacks.

Pros of buy now, pay later

  • You can pay for large purchases in installments. If you need to make a pricey or unexpected purchase, BNPL gives you a way to buy today and pay over time, even if you can’t afford the whole transaction right away. Unlike layaway, you’ll receive the item or service immediately.
  • It’s not uncommon to see 0% APR offers. Many BNPL services offer reasonable fees and terms, often with no interest on purchases or low interest rates. For many consumers, this can make BNPL more affordable than making purchases with a credit card, especially for those who don’t qualify for a personal loan.
  • Your payments could help your credit. Some lenders and retailers have begun reporting buy-now, pay-later payments. If yours does, your good payment history could help build your credit.

Cons of buy now, pay later

  • Missed or late payments could cost you big time. If you don’t make your payment on time, or miss it altogether, you’ll face negative consequences. The BNPL company may charge you hefty late fees, freeze your account to prevent future purchases, or even turn your account over to a debt collector (debt collections appear on credit reports).
  • Installment requirements are set. Buy now, pay later works like an installment loan, with a portion of the purchase required up front and the remaining balance repaid in agreed-upon monthly installments. These agreements are usually short-term, and you’ll typically make four fixed payments either bi-weekly or monthly until you’ve paid off the balance.
  • BNPL is typically limited to participating retailers. Unlike a credit card, you can only use a buy-now, pay-later service at participating retailers. If you’re looking to make a large purchase and BNPL isn’t available, you’ll need to find an alternate payment solution.

Some BNPL companies are beginning to offer debit card accounts with built-in installment plan options. While these give consumers the flexibility to split payment for purchases made at any retailer, purchase limits are tied to your bank account balance — eliminating the benefit of using BNPL for large or unexpected purchases.

Credible makes it easy to compare personal loan rates from various lenders, and it won’t affect your credit.

Credit card vs. buy now, pay later

Buy-now, pay-later services are similar to credit cards, giving you flexibility when making purchases. But there are also some important differences to note:

  • Both allow you to make purchases today and pay them off later. Credit cards and BNPL services both make it easy to purchase something immediately but pay for the transaction over time. This can be beneficial whether you have an unexpected expense crop up or need to make a large purchase.
  • BNPL must be repaid in a short series of installments. Unlike credit cards, which have a revolving monthly payment based on the remaining balance, BNPL transactions are repaid in set installments. The purchase is broken into a predictable monthly or bi-weekly payment plan, similar to a personal loan.
  • BNPL is only offered through participating merchants. Buy now, pay later is only available through retailers that participate in BNPL programs, or by applying for certain debit card products through select BNPL companies. While many retailers are beginning to offer BNPL, it still doesn’t offer the same flexibility as credit cards, which are accepted nearly anywhere.
  • No-interest options may be available. With certain BNPL services, you may be able to avoid interest charges as long as you pay off your purchase within a short period of time. Credit cards also offer this benefit; if you pay off your statement balance before the due date, you won’t pay any interest on your credit card transactions. Many credit cards also offer 0% APR offers for new cardholders, which can be used for large purchases and unexpected bills.

If you decide to take out a loan to fund a purchase, Credible lets you easily compare personal loan rates to find one that suits your needs.