How Does Buy Now Pay Later (BNPL) Work?

The buy now, pay later strategy is a business model that takes advantage of a person’s need for instant gratification. It targets impulsive buyers by offering a seemingly lower price tag. Yet what does it entail?

When you buy an item with this kind of installment plan, you’ll often see a set time and payments. Instead of paying for a new iPhone at $975, you can divide those payments. Usually, BNPL payment providers such as Klarna will divide it into four equal payments every two weeks, so you will have to make four payments of $243.75 in this case. This is excluding any fees that the provider may charge, including late fees, interest, and transaction fees.

Its popularity appears noticeably through data. The first months of 2021 saw installment plans skyrocket. People wanted to buy items out of their budget and felt that the buy now, pay later plan was the best move.

Yet when you look at it, there is a price to pay. If you continue to buy items that you can’t pay off, you may face late fees and other financial hits along with the money you still have to pay for the items you bought.

Should You Consider Buy Now Pay Later?

BNPL is attractive in many ways, though the ideal scenarios to use it are often few and far between. You should avoid using it to fuel impulsive purchases that you don’t need. Buying it now and signing the agreement right away is what they want. It can create a cycle of wanting to keep using BNPL as an alternative to having cash on hand. When that happens, you could spiral into debt.

This is unlike agreements for big-ticket items like mortgages or car purchases. While these are similar to BNPL, the difference is that a house and a car are needed, while most items bought through BNPL are impulse buys.

Before getting into a BNPL agreement, consider if it’s something that can be helpful to your current state. If you don’t have essential appliances at home and are short of cash, then going for a BNPL on a refrigerator can help you out. However, if it’s only for the next designer item or a new gadget you see on social media, it may not be worth it.

If you do want to seek it out, you’ll want to find out the following:

• How much interest do they charge?

• Are there any fees for late payments?

• Does the retailer report to credit bureaus?

If they charge any fees, then you will end up paying more for the item than you would if you had saved up and bought the item all at once. Besides that, if you get behind on payments, your credit may take a hit. Take a step back before checking out and weigh the consequences of this type of plan.

In addition, BNPL plans are generally better for some people than they are for others. If you are not easily swayed to make impulse purchases, then you could use a BNPL plan for necessities and have the benefits of paying it off later. However, if you are someone who finds credit cards and other solutions that don’t require paying upfront to be tempting, then it is usually better to skip out on a BNPL plan and save your purchase for a later date.

It’s Not Going to Stop

More and more businesses began adopting the BNPL model because of its profitability. Today, you’ll find these options in nearly every store, and almost half of all Americans have used or accessed an app related to it. These services are also partnering with big names. We see brands such as:

• Bath and Body Works

• Target

• Amazon

• And many more

Companies like PayPal, Affirm, and Afterpay become the center of this phenomenon. While it is good for business, it’s far from being the ideal move when it comes to our finances.

The names and numbers will continue to rise with this increased interest in quick access to expensive items. Surveys show that people would lock into the sale more often than not if they had the option of paying for it rather than buying upfront.

The Most Popular BNPL Websites and Apps

While Buy Now, Pay Later options are now available throughout different companies in the US, it comes from specific services. Being aware of the most popular ones can help you spot a BNPL model before committing to the purchase. These companies are:

• Klarna: A BNPL service that offers no interest rates. However, if you fail to pay after two attempts, it will charge a late fee of $7. You’ll often see it used at apparel stores like Foot Locker and Sephora. It should be noted, however, that you can apply for a line of credit, and if you’re approved, these do have interest rates.

• Afterpay: One of the largest and arguably the businesses that made BNPL models widespread. There are no additional fees with their service, but they will charge late fees. You see Afterpay used by companies like Bed Bath & Beyond and Old Navy.

• Sezzle: Sezzle doesn’t have an interest rate, and there are also no late fees. However, it will deactivate your account if you’re late, meaning you won’t be able to shop from that store again unless you pay to reactivate. You see it used by thousands of shops and big-box stores like Target.

• Affirm: Affirm is one of the BNPL services that have interest rates. It means that you’re paying more each time you opt for its service. Its highest interest rate is 30% APR though they have no late fees. You’ll see many companies use this service, such as Adidas and Walmart.

• Zip: Zip has a mobile app you can use to manage payments. You often see it used among online stores and retailers. They have convenience fees though there is no interest. They also charge late fees.

• PayPal: One of the most popular online payment systems also adopted the BNPL through its website and app. There are no late fees or interest rates with PayPal, though they usually have other charges included. Stores like Best Buy use PayPal.

A Lack of Regulation

One of the issues of a BNPL product is there are almost no regulations surrounding them. They have the freedom to charge fees and interest as they please. There are also no laws preventing them from using predatory practices on those who have problems with spending and money. While there are no talks about debt with BNPL, many people have this problem.

It’s similar to spending with a credit card. You purchase in advance, thinking you can pay it once your money goes through. However, an emergency happens, and you have to use your income elsewhere. You get into debt and spend more each time you miss a pay cycle.

A concern among many is that BNPL takes advantage of the debt culture in America. We have student loans, credit cards, and mortgages to think about. The people have convinced themselves that taking on this extra financial pressure is manageable. However, each additional debt they take increases their risk of devastation.

Taking Advantage of Emotions and Psychology

The Buy Now, Pay Later model takes advantage of a shopper’s psychology and uses it against them. There is an illusion of financial accessibility with a lower cost. It forces them to keep buying more and eventually nurtures an environment where they rely on it. Klarna even released a report showing that the BNPL can affect people who have a resolve against impulse purchasing.

Combined with how easy it is to make payments thanks to new technology, BNPL becomes a likely future of shopping. The question becomes whether there will be ways to protect the consumer, especially those prone to getting into debt.

The answer may be that it will be unlikely in the U.S. With a society so used to debt, it will be up to the people to find ways to combat the urge to overspend. The best approach will be to build discipline and create a habit that prevents unnecessary purchases. The increasing debt in the country reflects the consequences caused by the promotion of these credit options.