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What Is Buy Now, Pay Later?

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NMLS #3030

If you’ve ever gone shopping, either online or at a brick-and-mortar retailer, you’ve probably seen something you wanted, wished you had the money to buy it and moved on.

Retailers understand it isn’t always easy to buy something if you have to put up all the money upfront. That’s one key reason they now offer point-of-sale installment loans or Buy Now, Pay Later (BNPL) financing to shoppers. 

With BNPL, you can buy something you want, pay part of the cost at checkout and spread out the cost over a few weeks or months. Even better, BNPL is often interest free.

BNPL offers a lot of benefits that can make larger purchases easier and more affordable. 

How Does Buy Now, Pay Later Work?

BNPL works a lot like an unsecured personal loan. With BNPL, a third-party lender provides the money you need and you agree to repay the loan plus interest in weekly, bi-weekly or monthly installments. 

Because of the extra effort required to set up a plan, BNPL is usually reserved for purchases with a price tag ranging from $100 to several thousand dollars.[1]

A hard credit inquiry may not be required

One of the benefits of BNPL is that you can set up your payment plan at checkout, so there’s no complicated application process. Instead, the lender may perform a soft credit check which won’t show up on your credit report. You can usually get approved for a BNPL plan on the spot as long as you:

  • Are at least 18 years old
  • Have a mobile phone number
  • Have a bank account, credit card or debit card to make payments
  • Can verify your identity with a driver’s license, passport or other form of valid ID

Payments may be interest-free

That’s assuming you make your payments on time and in full. Late payments may result in a higher interest rate or additional fees. Not all BNPL plans are interest-free. You may need to meet certain conditions or agree to a specific repayment schedule. Otherwise, you may be charged interest which will be added to your payments.

A down payment may be required

Depending on the size of your purchase, you may need to pay up to 25% of the cost of the item upfront. For example, if you buy a $1,000 refrigerator, you may need to pay $250 at the register and then make 3 additional payments of $250 until you’ve paid off your balance.

While different forms of BNPL, like layaway or lay-by, have existed for decades, online shopping boosted its popularity to new heights. Why? Unable to spend money outside of the home, people started spending their extra income online. BNPL made it easier to make bigger purchases, which in turn spurred more shopping.

Not wanting to miss out on the action, larger retailers started partnering with financing companies like Affirm, Afterpay and Zip so they could offer BNPL financing to their customers.

Is Buy Now, Pay Later a Good Idea?

BNPL can be a helpful way to buy something. It makes a large purchase easier to afford and can save you money in interest compared to credit cards and other high-interest loans.

But BNPL is also designed to help vendors sell products. By making it easier for you to borrow the money you need to buy something, vendors can sell more products and make more money. And unlike banks and online lenders, the retailer gets their money either way. So they have no real incentive to encourage you to be cautious.

Taking on more debt than you can handle can make it harder to meet other financial obligations. It’s up to you to be honest with yourself about your financial situation. If you’re already struggling with debt, taking on another loan, even a short-term one, can add insult to injury and make it even harder to get out of debt.

So consider these pros and cons before you say yes to BNPL:


No credit score requirements

While terms will vary based on the lender, you may be able to use BNPL with a lower credit score than you might need to qualify for a personal loan through a bank, credit union or online lender.

Interest-free installment plans available

Because BNPL usually offers 0% or lower interest rates than most credit cards, it can be a good way to save on interest while still being able to buy the things you need.

Quick approval process

Because BNPL usually happens at the point of sale, you don’t have to apply in advance or wait to get the money you need.


BNPL usually involves less paperwork and less time hunting for documentation than a personal loan.

No repossession

If you fail to make payments, a BNPL provider won’t come to your house and repossess what you bought using their money. But you may be subject to debt collection and a hit on your credit score.


Run the risk of overspending

While BNPL can be tempting, there’s the risk of getting in over your head. Before you commit to buying something using BNPL, make sure your budget can handle it first.

Some plans charge late fees

If you miss a payment, some lenders may charge you expensive late fees. These can add up quickly if you don’t make your payments.

Miss out on the perks of using a credit card

While it’s not a good idea to carry a balance on your credit card, being able to just pay the minimum when money is tight can be helpful in the short term. With BNPL, your payments need to be made in full and on time. Also, using BNPL means you won’t be able to take advantage of the points or travel miles you’d get if you used a rewards card.

Returns/exchanges of products using BNPL can get tricky

When you buy something using cash or a credit card and later decide you don’t want it, you’re usually able to return it and get your money back. With BNPL, it’s harder because you need to return the item and then arrange to get your money back from the lender. So before you buy anything with a BNPL plan, make sure you understand the return policies.

Less regulation

BNPL loans aren’t regulated like a credit or debit card, and so there are fewer consumer protections. This makes it harder to dispute a charge if the seller fails to deliver or your product is broken or defective. The Consumer Financial Protection Bureau (CFPB) is performing an official inquiry into the BNPL industry, but that was only announced in December of 2021.[2]

Credit Card Repayment Plans

Many credit card companies are now offering their own payment plans for large purchases. Essentially, the credit card company breaks down your purchase into monthly payments which get added to your minimum monthly payment. You’ll need to pay a monthly fee for this, but you can avoid having to pay more in interest if you use a repayment plan instead of carrying the balance from month to month.

Plus, you can still get rewards points or travel miles for your purchases.

Does Buy Now, Pay Later Affect My Credit Score?

BNPL plans aren’t automatically reported to the three credit bureaus. If you use BNPL responsibly, it won’t have a negative impact on your credit score, but it won’t have a positive impact either. However, if you miss a payment, it will be reported to the credit bureaus and hurt your credit score.

Layaway 2.0

In the past, your parents or grandparents might have taken advantage of in-store layaway. This would allow them to buy something – like an expensive holiday gift – in installments. That way they could pay it off over time and not worry about it being sold to someone else before the big day. 

BNPL works in the same way. The key difference is that you get to take your purchase home with you the same day. The drawback is that it’s easy to go overboard with your purchases and get into debt you can’t manage.

BNPL isn’t a bad thing, but like any form of credit, it needs to be used responsibly.

The Short Version

  • With Buy Now, Pay Later (BNPL), a third-party lender provides the money you need and you agree to repay the loan plus interest in weekly, bi-weekly or monthly installments
  • While different forms of BNPL, like layaway or lay-by, have existed for decades, online shopping boosted its popularity to new heights
  • If you use BNPL responsibly, it won’t have a negative impact on your credit score, but it won’t have a positive impact either
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  1. Consumer Financial Protection Bureau. “Should you buy now and pay later?” Retrieved July 2022 from https://www.consumerfinance.gov/about-us/blog/should-you-buy-now-and-pay-later

  2. Consumer Financial Protection Bureau. “Consumer Financial Protection Bureau Opens Inquiry Into “Buy Now, Pay Later” Credit.” Retrieved July 2022 from https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-buy-now-pay-later-credit/

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