The Hazards of Buy Now, Pay Later

Breaking up payments can make a big purchase seem cheaper, which can tempt you to overspend.

Photo of woman looking at computer and shopping while eating noodles.
(Image credit: Getty Images)

Once upon a time (I am told), it was common practice to walk into a store and put an item on layaway. You’d put down a deposit, make payments over time and collect your item once you paid it off. But now, a new service has turned layaway on its head. With Buy Now, Pay Later (BNPL), you don’t have to wait to bring home something you pay for in installments. Instead, a third party offers you a loan at checkout to cover your purchase, in some cases with no interest or additional fees. More than one-third of U.S. consumers have used such a service at least once, according to research by The Ascent (opens in new tab), a subsidiary of The Motley Fool. And BNPL is the fastest-growing e-commerce payment method globally, says Worldpay, a unit of payments processor FIS.

When shopping online, I’ve noticed BNPL offerings for clothes and shoes, but the most popular spending category for BNPL services is consumer electronics, according to a survey by CouponFollow (opens in new tab), a consumer savings engine that markets popular coupons. But these point-of-sale loans are on the increase for everything from furniture to travel. For example, VRBO, the online marketplace for vacation rentals, and travel provider Expedia have partnered with Affirm, one of the largest BNPL services.

The industry is young, and the pandemic has certainly been a catalyst for its growth. Affirm went public in January, and its stock price has more than doubled. BNPL’s market share in North America is expected to triple in the next three years, says Greg Fisher, chief marketing officer at Affirm. Klarna, whose Super Bowl commercial featured actor Maya Rudolph on a mission to buy a fabulous pair of boots, services more than 15 million customers in the U.S., says David Sykes, head of Klarna US. PayPal recently rolled out several new “pay later” products in the U.S., the U.K. and France.

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Weigh all the costs. BNPL services offer a way to cover the cost of something you need right away, says Linda Sherry, director of national priorities for Consumer Action. But it’s important to thoroughly vet the service you choose. Keep an eye out for late fees, interest and whether you’ll pay more for the product or service than you would by paying up front.

The services’ interest policies vary. PayPal’s U.S. BNPL service charges no interest on purchases as long as you spend at least $99. Klarna and AfterPay don’t charge interest, either—although, like PayPal’s BNPL service, their payment plans generally have a shorter time line (typically eight weeks). Affirm, however, which bills in three-, six- or 12-month installments, charges anywhere from 0% to 30% interest on purchases, depending on your credit. Many of these services check your credit history in order to qualify you for the loan.

Even if the price is the same, breaking up payments can make a big purchase seem cheaper, which can tempt you to overspend. Also bear in mind that if you need to return an item, you might end up waiting longer for a refund than if you had paid in full up front. With some services, any interest you pay is non­refundable. And though making BNPL payments on time won’t help you build credit, missing payments could hurt your credit score.

I love finding good deals, but BNPL feels like a perfect invitation to live above my means. So even though I would love to book a VRBO in Aspen for my 24th birthday and pay it off later, this Gen Zer/cusp millennial is going to save for 25 instead.

Emma Patch
Staff Writer, Kiplinger's Personal Finance

Emma Patch joined Kiplinger in 2020. She previously interned for Kiplinger's Retirement Report and before that, for a boutique investment firm in New York City. She served as editor-at-large and features editor for Middlebury College's student newspaper, The Campus. She specializes in travel, student debt and a number of other personal finance topics. Born in London, Emma grew up in Connecticut and now lives in Washington, D.C.