How Does Buy Now, Pay Later Work? – A Comprehensive Beginner’s Guide

There are times you explore items on a particular e-commerce website while adding some to your shopping cart, but when you reach the checkout page, you realize the total amount exceeds your budget. At this point, you are torn between dropping some items and increasing your budget. The second option, however, may cause you to go broke. Therefore, if you would love to keep all the items, a better option would be “buy now, pay later.”

But what is it exactly? This guide explains how the buy now, pay later option works.

Understanding Buy Now, Pay Later

As the name suggests, buy now, pay later is a type of payment plan that lets people purchase products immediately and then make payments at a later date. Most times, payment is made in installments within a specified period. In short, Buy now, pay later works like hire purchase. Several e-commerce companies already accept this payment method.

How Buy Now, Pay Later Works

For an e-commerce platform to support the buy now, pay later (BNPL) option, it has to partner with a BNPL provider to add the payment method on the checkout page. Note that some BNPL providers charge interest on your repayments while others do not.

In most cases, you will be required to make a deposit to acquire the item, and then the balance will be spread over a predefined period.

Advantages of Buy Now, Pay Later

Interest-Free Repayments

As stated earlier, there are BNPL providers that do not charge interest on payments. This allows you to purchase your favorite product at no extra cost.

Shallow Credit Card Checks

BNPL providers don’t conduct hard checks on people’s credit reports. That means getting approval to use the buy now, pay later option to purchase items is easy.

Convenient

Since it is simple to purchase items using buy now, pay later, the payment option offers much-needed convenience to shoppers.

Simplified Payment Process

Most BNPL providers deduct payments automatically from shoppers’ accounts on the due date. Therefore, you don’t have to monitor repayment dates in order to make the payments manually.

Disadvantages of Buy Now, Pay Later

BNPL Can Get You Into Debt

Every time you purchase products using buy now, pay later, a debt is created that must be honored. If you use this payment method to acquire multiple items, let’s say within a month, you could end up in bad debt, making you unable to fulfill other obligations such as rent.

Late Payment Charges

If you fail to repay on time, BNPL providers usually charge a late fee, which is incurred daily until payment is made.

No Opportunity to Boost Credit

Unfortunately, your credit score will remain the same even if you make timely repayments. That is because BNPL providers do not work with credit bureaus.

Top 4 BNPL Providers

There are several BNPL providers in the market today. This article explores the top four.

PayPal Pay Later

Many e-commerce sites that accept PayPal as a payment method also allow shoppers to use its “Pay Later” payment plan, which offers two repayment methods: Pay Monthly and Pay in 4. If you pick the former, expect an interest fee to be charged, while choosing the latter lets you enjoy interest-free repayments.

AfterPay

With AfterPay, payments made in four or fewer installments are usually interest-free. As of September 2023, the BNPL provider has a presence in the United States, Italy, Spain, France, New Zealand, Canada, and Australia.

Affirm

While most BNPL providers only allow the payment method to be used on e-commerce websites, Affirm lets shoppers buy products in certain physical stores and pay for them later. It is available in the United States, Australia, and Canada.

Klarna

With Klarna, you can only make repayments in three installments within a period of six weeks. If you fail to repay on time, a 25% late fee applies to your installments. Klarna is now available in more than 30 countries.