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How Buy Now, Pay Later Plans Actually Work

Buy now, pay later plans. Are they the real deal? Or should they be relegated to the bin of ‘too good to be true’ or ‘There’s no such thing as a free lunch’?

According to market research firm Grand View Research, the global buy now pay later (BNPL) market hit a staggering estimated $5 billion last year alone. Add to that Apple’s entrance into the market with Apple Pay Later, and you can expect the industry to rise to a whole other level.


Buy Now, Pay Later Explained

It’s a fairly simple concept:  Cash-strapped shoppers purchase an item, bring it home, and pay for it later. But hold on:  Before you pack up your purchases, you’ll need to create an account with a third party such as Afterpay, Klarna, Affirm, Sezzle, PayPal, and others.

To be eligible for an account, you’ll need to be at least 18 years old and have a valid debit or credit card linked to the account. In some instances, a company will run a credit check before determining the number of purchases you’ll be allowed to finance. After you’ve completed the sign-up process, you can BNPL at any of the stores associated with that service. In the majority of cases, the installment plans are interest-free, and you’ll only be required to pay extra if you don’t make the payments on time.

BNPL is becoming increasingly popular when it comes to online shopping, especially among young consumers. More than 45 million Americans aged 14 and older will use BNPL services this year, according to Insider Intelligence, and it’s predicted that over 80% of those users will be of the Gen Z and millennial generations. According to Juniper Research, BNPL payments are expected to account for almost a quarter of all global e-commerce transactions by 2026.



There are several reasons why BNPL programs are becoming the purchasing program of choice, including:

  •  No need for a stellar credit score
  •  Avoiding credit card-type fees (if you stay on top of your repayment plan)
  •  Earning rewards and loyalty program bonuses
  •  Potential for spacing out payments to accommodate your budget or employment pay period




The BNPL industry’s rapid growth is just one of the reasons this manner of purchasing has come to the attention of the Consumer Financial Protection Bureau (CFPB). Like other forms of credit, BNPL payment plans and bills can have negative consequences, including:

  • Expensive late fees if you can’t make your payments on time
  •  High-interest rates 
  •  Payments added to your credit card balance (if your BNPL plan is linked to your credit card)
  •  Contributing to the habit of spending money you don’t have
  •  Damaging your credit score (if the BNPL companies conduct a hard credit check, which can temporarily ding your credit score)

When all is said and done, the responsibility of choosing or passing on BNPL programs is up to the consumer. BNPL programs should be regarded as a borrowing tool like any other, one that should be used judiciously and that comes with its own set of pros and cons. Even with more stringent regulation on the horizon, money experts are raising concerns about the amount of debt that can come from consumers’ increasing reliance on BNPL plans.