Buy now, pay later, or BNPL, is a type of installment loan. It divides your purchase into multiple equal payments, with the first due at checkout. The remaining payments are billed to your debit, credit card or bank account until your purchase is paid in full. These plans can come with interest and fees, though some plans, depending on the provider, charge neither.
How does buy now, pay later work? During checkout, you’ll see an option to break up your total purchase and pay a smaller amount now, instead of the full balance.
If interested, you’ll fill out a short application directly on the checkout screen. It may ask for information like your name, address, email address, date of birth, phone number and Social Security number. You’ll also provide a payment method. Then, the BNPL provider may perform a soft credit check, which won’t affect your credit score, and approve or deny your application in a matter of seconds.
A boom in online shopping and innovation in digital payments have further spurred demand for the services. Younger shoppers appear to have driven much of the growth in BNPL to this point. Younger buyers seek instant gratification. Financial flexibility is a major draw of BNPL services, particularly for younger generations. These solutions give younger consumers greater payment flexibility, particularly for larger-ticket items, whose cash flow is typically more limited.
One obvious risk with BNPL programs is that those seemingly affordable payments may tempt you to splurge. In some surveys last year, Two-thirds of BNPL customers said they are buying jewelry and other “want” items that they might not otherwise purchase, the survey found. Consumers may also find that installment payments are harder to track. You may also face challenges if you have a problem with your purchase, such as obtaining a refund for a product that didn’t arrive or turned out to be defective. That’s because you will have to meet the requirements of both the BNPL lender and the retailer.
Unlike credit card issuers, which are subject to strong federal regulation, these short-term lending programs are relatively new and receive minimal, inconsistent oversight from federal and state bank regulators. BNPL lenders generally require consumers to first contact the merchant to get credit for a return or refund. Until the lender is notified by the retailer that the transaction has been voided or a refund issued, you may have to continue to make payments on your loan.
Here, BNPL also risks encouraging unnecessary spend and pushing the underserved further intro debt traps. While industry players need to prioritize responsible product design, consumer education, and transparency to prevent the potential pitfalls associated with uncontrolled borrowing.