The concept of Buy Now, Pay Later has been around since the Great Depression. Layaway shopping, which mostly disappeared during the 1980s, involved making a small deposit and installment payments before taking your purchase home. Although layaway made a brief comeback during the Great Recession, it has since been replaced by higher-cost financing options, like credit cards.
Now shoppers have another option: Buy Now, Pay Later services. The biggest difference from layaway is you don’t have to wait to take your item(s) home, which may be why these services are becoming more popular. You may see Buy Now, Pay Later companies like Affirm, AfterPay, Klarna, QuadPay—and now PayPal—at the register in-store or when shopping online.
Over a third of Americans have used Buy Now, Pay Later, according to a new report from The Ascent. These services have become particularly in-demand for online shopping amid the pandemic. The problem is, most shoppers don’t understand how these services work. Here’s what you should know before using Buy Now, Pay Later.
The benefits of Buy Now, Pay Later
There are a few reasons why Buy Now, Pay Later services are growing in popularity. “The big draw of Buy Now, Pay Later services is that you may get an interest-free payment plan, and you don’t need good credit for approval,” says Nathan Hamilton, credit card expert and industry analyst at The Ascent. “They’re also very convenient—you can set up everything in a few minutes during the checkout process,” he says.
You may spend more with Buy Now, Pay Later
Although Buy Now, Pay Later may offer some perks, there are also some drawbacks. The biggest one may be spending more than you intended. According to a 2019 Klarna report, these services increased shopping at Gymshark by 33%.
“Try not to make a habit of using these services. They’re helpful if you really need to finance a purchase, but whenever possible, it’s best to avoid taking on debt for everyday purchases,” Hamilton recommends.
Watch for costly fees and interest
Another downside: the potential for fees and interest. Depending on the Buy Now, Pay Later company, and your creditworthiness, you may pay fees, interest, or both for the convenience of financing.
For example, Affirm charges an APR of 10% to 30%, based on your credit score—and Klarna charges 19.99% for standard purchases with a minimum of $2.00 per month.
Although some companies may offer 0% APR for a specific timeframe, you may pay a lot more once the promotional period ends. “Buy Now, Pay Later works well when you stick to the payment schedule, but if you don’t, you could get charged fees and interest,” Hamilton warns.
To avoid trouble, Hamilton recommends reviewing the payment schedule—including the exact payments, when they are due, and how long you have to pay off your purchase. “It’s also worthwhile to check how much the late fees and interest are, because that can be great motivation not to miss a payment,” he adds.