What Is Buy Now, Pay Later (BNPL)?

By Catherine Brock – Updated Dec 13, 2024 at 9:43AM

Key Points

BNPL offers short-term, often interest-free loans, splitting purchase costs into installments.
Using BNPL doesn't usually affect credit scores as providers typically do soft credit checks.
Late payments in BNPL can lower credit scores and increase future financing costs.
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Tech that makes shopping easier may add convenience to your life, but at what expense? One shopping innovation that's growing in popularity is buy now, pay later (BNPL) financing. Below, you can learn all about BNPL, including the pros and cons, how to use it and what it can cost you.

Two friends drinking coffee and shopping for clothes online.

Image source: Getty Images.

What is BNPL?

What is buy now, pay later (BNPL)?

Buy now, pay later, also known as BNPL, is short-term financing for smaller retail purchases. In its traditional form, BNPL is an interest-free installment loan that splits a purchase price into two to four payments. With BNPL, you might pay $25 every two weeks for a new pair of shoes instead of $100 immediately.

However, the BNPL landscape has grown beyond the four-payment installment loan. Some providers also offer 30-day interest-free loans for the entire purchase price. You might use this loan format to try a product before paying for it.

If you decide not to keep the product, you'll return it and let your BNPL lender know. You are still obligated to the terms of your loan until the lender confirms the return.

The lender for interest-free BNPL programs collects fees from the retailer, which explains why you pay no interest. The downside is that your purchasing power is limited, usually to $1,000 or $1,500.

Note that retailers don't always foot the bill for BNPL financing. Even for small purchases, you may see three- or six-month payment plans that charge interest. For larger purchases, BNPL providers may offer interest-bearing loans with terms of up to 24 months.

Pros and cons of BNPL

BNPL financing has two primary advantages for you as a shopper. It's accessible and -- often -- interest-free. These short loans are easier to get than a credit card or a personal loan. And, when they're free, it's an economical choice for a purchase you can't quite manage in cash.

Another benefit is that applying for a BNPL loan usually doesn't affect your credit rating. BNPL providers usually perform soft credit checks, rather than the more damaging hard credit checks other lenders use.

Now, for the bad news: The main problem with free and paid BNPL financing is that it encourages purchases you can't afford. It also contributes to your debt load. And, if you miss payments, the provider can report it to the credit bureaus, lowering your credit score and possibly raising interest rates on any future financing you try to get.

Late payments may also result in extra fees from your BNPL lender.

Loan Default

When you stop making payments on a loan, the loan is in default. However, there can be other considerations depending on the type of debt.

How to use BNPL

Where to access BNPL

If you shop online, you've likely already seen BNPL offers. These financing options are built into many retailer checkout pages. Shop Target.com, for example, and -- depending on the purchase amount -- you may see options to buy now, pay later with either PayPal or Affirm.

Walmart also uses Affirm as its BNPL provider. Amazon has a branded BNPL program called Amazon Monthly Payments.

You can also use BNPL apps to get short-term financing for in-store purchases or purchases from online shops that don't offer loans in the checkout process. BNPL providers with smartphone apps include Affirm, Afterpay, PayPal Pay in 4, Klarna, Perpay, and Sezzle.

BNPL in action

Let's say your social calendar is filled with weddings and events in the next month, and you have nothing to wear. You head to your favorite fast-fashion store online and load up your cart with two cocktail dresses and a pair of shoes. The total with tax comes to $239.91.

In the checkout process, you see an option for PayPal Pay in 4. You are directed to log into PayPal, and you see that you're preapproved for four installment payments of $59.98. Although the loan is interest-free, you do pay an extra $0.01 due to rounding. Accept the offer, and you'll make the first payment immediately. The remaining three installments are due every two weeks.

You may also see an option for extended financing with interest. A short-term purchase loan from PayPal will have a fixed interest rate ranging from 9.99% to 35.99%, depending on your credit. PayPal will suggest a loan term, such as six months, and show you the monthly payment amount. At a midrange annual percentage rate (APR) of 22%, a six-month loan of $239.91 will cost you $15.66 in interest.

If you prefer to shop in-store, you can secure financing with an app like Affirm. You'll create an account in the app and provide your income and identity details. The app then calculates your credit limit. After you select a store and share the purchase amount, you'll see your financing options. Choose one, and the app generates a single-use barcode or credit card you'll use to pay at the register.

Whether you're shopping online or in-store, the BNPL process is easy and quick -- which is good and bad. An interest-free loan can help you manage your cash flow and reduce the budgetary sting of a big purchase. But once you're in the BNPL system, those pricey interest-bearing loans are just a few clicks away. Those are best avoided since the interest charges can easily break your budget and deplete your savings account.