'Buy Now, Pay Later' Cards Are Coming. Should You Get One?

Buy-now-pay-later companies -- often abbreviated as BNPL -- include companies like Affirm, Klarna, and Afterpay (a subsidiary of Block). The BNPL business model exploded during the pandemic-fueled e-commerce boom of the past few years, and you've probably noticed offers to split your purchase into a few interest-free monthly installments when checking out at your favorite online merchants.

However, BNPL growth has slowed significantly as the pandemic-era growth has stalled and economic worries are making consumers more reluctant to spend money on non-essential purchases. So, some of the largest BNPL operators are rolling out co-branded payment cards that can be used anywhere -- not just at retailers that directly offer their services.

How do buy-now-pay-later services work?

BNPL services are somewhat of a combination of a credit card and an installment loan. They split a purchase between a series of monthly payments, like a short-term installment loan. But like a credit card, the application process is quick and easy, you typically get an instant approval decision, and the money is paid directly to the merchant to complete a purchase.

Some BNPL services offer interest-free financing that is subsidized by the merchants -- for example, Affirm's most notable relationship involves offering interest-free financing on Peloton bikes and other fitness equipment. Others charge interest based on the customer's creditworthiness, while some only charge interest to borrowers whose credit histories aren't fantastic.

BNPL credit cards

As mentioned, some of the leading BNPL companies are issuing physical payment cards. Klarna was the first of the major BNPL to issue a co-branded Visa card. Affirm and Afterpay followed soon after.

As an example, the Affirm Card is designed to offer customers financing with the flexibility to spread their payments over time. One of the biggest limitations of BNPL in the past has been that these services could only be used if a merchant was a participant and offered the financing to its customers. The Affirm Card can be used everywhere major credit cards are accepted. When making a purchase, Affirm Card customers are given options for their payment plans, with six- and 12-month repayment options common.

Unlike with a traditional credit card, the payments are split evenly over the repayment period, as opposed to having a low minimum required payment, so when the payment period is over, the balance is paid off. Affirm's card links to customers' bank accounts, and therefore is technically a debit card, not a credit card. Some of Affirm's payment plans are interest-free, while others charge interest, although it can be significantly less than the average credit card interest rate.

Consider the pros and cons

Like any financial tool, there are pros and cons of using BNPL payment cards. For example, the requirement to make a series of equal monthly payments can encourage you to be more responsible with your spending, as opposed to credit cards where the minimum payment will result in you paying for over a decade and spending thousands on interest. Also, because BNPL cards link to your checking account, it's important to make sure there's enough money in the account before every payment is due to avoid incurring overdraft fees.

The bottom line is that BNPL cards can certainly help you split big purchases over a few installments, making them easier to plan for, and you might not even have to pay any interest. However, paying for purchases in installments can certainly encourage some people to spend more than they otherwise would, and it's easy to get into trouble if you're not careful.