How it works
You download a buy now, pay later app. You shop at a merchant that supports the app. At checkout, you select the app as your payment method. You pay the first installment, typically a quarter of the total price. You take the item home. Every two weeks, you pay another quarter. After six to eight weeks, it is paid off.
As long as you pay on time, there is no interest. This is why it is more attractive than credit cards. Credit cards start charging interest from the purchase date if you do not pay in full during the grace period.
How the apps make money
If consumers do not pay interest, how do buy now, pay later apps make money? Three main sources.
First, they charge merchants. Every time you use the app to shop, the merchant pays the app a transaction fee, typically three to six percent of the item price. Merchants are willing to pay this because studies show that offering buy now, pay later makes consumers buy more.
Second, late fees. If you miss a payment, the app charges a late fee. The amount is not large, but if you are late often, the fees add up.
Third, some apps offer longer-term installment plans, such as paying over twelve months. These plans charge interest.
Benefits of using buy now, pay later
You do not need the full amount upfront. This is helpful for higher-priced items. Most apps do not check your credit score, at least most of the time. Approval is fast, within minutes. If you pay on time, some apps report your payment history to credit bureaus, helping you build credit.
Risks of using buy now, pay later
The biggest risk is that you buy what you cannot afford. Because each installment payment is small, you might use multiple apps to buy multiple items. Your total monthly payment could be much more than you realize.
Another risk is late fees. If you forget a payment, even by one day, you are charged. Automatic payments can also cause bank overdraft fees if your account balance is low.
Returns are more complicated. With a credit card, the refund goes directly back to your account. With buy now, pay later, you need to coordinate with both the merchant and the app company. The refund can take weeks.
Buy now, pay later vs. credit cards
Credit cards allow you to roll debt. You can pay only the minimum and leave the balance for next month, but interest accrues. Buy now, pay later forces you to pay off within weeks, or you are charged.
Credit cards have stricter credit checks. Buy now, pay later typically does not check credit.
Credit cards offer consumer protections like dispute rights and chargebacks. Buy now, pay later has weaker protections.
How to use buy now, pay later safely
Use only one plan at a time. Do not use three or four apps for different items at the same time. The total monthly payment quietly adds up.
Set payment reminders. Mark each due date on your calendar, or turn on automatic notifications from the app.
Test with a small amount first. If you have never used a particular app, buy one cheap item. Learn how they charge, how they notify you, and how fast customer service responds.
Read the terms. Find answers to two questions: how much is the late fee, and what happens if I return the item?
Do not use it for things that lose value quickly. Buy now, pay later does not make a bad purchase decision better. It just makes the payment feel easier.
Who should use buy now, pay later
If you have stable income, can pay off within six weeks, and were going to buy the item anyway, buy now, pay later is a reasonable payment method. It lets you keep your cash while getting the item immediately.
Who should not use it: people with unstable income, people who already have multiple installment plans active, people who easily forget due dates, and people who use buy now, pay later to buy things they would not otherwise buy.
An important reminder
Buy now, pay later changes how you pay, not how much you pay. A one thousand dollar item is one thousand dollars whether you use buy now, pay later, a credit card, or cash. Installments do not make it cheaper.
If you find yourself using buy now, pay later because you cannot afford the full amount now, that is a warning sign. You probably should not buy that item. Save first, then buy. Not buy now and hope to pay later.
Buy now, pay later is a tool. A tool is neither good nor bad. It depends on how you use it. Used correctly, it helps you manage cash flow. Used incorrectly, it loads you with more debt than you realize.
