What’s the Deal With Buy Now, Pay Later?

What’s the Deal With Buy Now, Pay Later? (Photo illustration: Rafael Henrique/SOPA Images via Getty Images)

As the school year draws near, college students across the country are buying furniture, clothes, decorations, books and anything else they may need. But all these purchases add up. And as the pandemic sets many young people back financially, we're figuring out how to spend our money efficiently without breaking the bank.

In a Credit Karma survey, 42% of Americans said they've used something called the "buy now, pay later" model. Vendors accepting this service have skyrocketed in the past year, including companies like Best Buy and Nike. But how is this any different than just paying with a credit card? Here’s what you should know about this emerging payment method and why so many young people are using it.

What is "buy now, pay later"? 

As the name suggests, the BNPL system allows users to purchase a product, but divides up the cost in separate installments — often into four equal payments. And those installments are dispersed across a six-to-eight-week payment cycle. So as opposed to paying all at once, consumers can buy a product while spreading out the money they owe.

To use a BNPL platform, consumers would register and link to their bank account or debit card. And from there, the installments will be taken out automatically as due dates approach.

This new system builds on the deferred payment plans of the past. But unlike a layaway for example — where customers pay for the item in increments and receive it after they've paid in full — people using BNPL receive the item as they would if they paid for it up front. 

Why is it so popular?             

In theory, BNPL allows users to purchase with flexibility. Since payments are broken up into smaller installments over a period of time, it can give people more time to pay. 

According to 2020 data from Experian, approximately 95% of adults in the United States have a credit card. However, when starting out, card holders usually have a low cap, which makes it hard to spend a lot. Oftentimes new card holders have a low spending limit because they haven't built a lot of credit yet. 

So part of the appeal of BNPL is the low barrier of entry to sign up. BNPL vendors like Sezzle and Klarna vow to only perform a “soft check” on credit scores, which is not as detrimental as a “hard check” credit card companies use to gauge candidacy for a card. But that isn't to say that using BNPL can't lower your credit score because it actually can if you make a late payment, according to Credit Karma.

Still, young people are buying into this payment model. And COVID likely plays a big part. The peak of the pandemic saw nearly a 14.8% unemployment rate. So for people struggling with employment, BNPL can seem like a better payment option because it spreads out the cost without additional charge — with certain exceptions. 

What are the drawbacks? 

Due to its infancy, BNPL isn't a commonly offered form of payment. Some businesses don't offer it as an option because of the service fees. Sezzle says its standard payment processing fee is 6% of the transaction, according to its merchant agreement. And while credit card companies do charge businesses for their service, the fee usually ranges between 1%-3%.

For both payment methods, interest accumulates on late payments. Afterpay, another BNPL company, charges up to 25% extra of the total purchase cost for late payments. And as previously mentioned, credit scores can take a hit if users don't pay on time.

BNPL systems also lack government regulation, which may not seem like a big deal, but it is. According to the United States Consumer Financial Protection Bureau, “BNPL loans currently lack the consumer protections that apply to credit cards. For example, BNPL companies don’t offer the same dispute protections as credit cards if the item you purchase is faulty or a scam.” Here is the bureau's full breakdown of the payment system.

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