If you’ve noticed more “buy now, pay later” options available while you’re online shopping, you’re not imagining things.
According to Adobe’s Digital Economy Index: COVID-19 Report, the buy now, pay later market experienced 215 percent growth year-over-year in the first two months of 2021, and the people using the service are placing orders that are 18 percent larger. All the while, more and more retailers are offering these services.
Still, are buy now, pay later services a good idea? Plus, what’s the better option: Buy now, pay later retail services or traditional credit cards?
What is buy now, pay later?
Buy now, pay later (BNPL) is exactly what it sounds like. Rather than paying for the entire cost of an item upon purchasing it, you pay for it in monthly installments. Some credit card issuers offer their own BNPL services, and there are also independent BNPL companies.
The structure of BNPL programs varies. Usually, the plan is interest-free for a standard timeline of four installments, and thereafter customers have to pay interest. Sometimes there are fees for late payments, and sometimes there aren’t.
“With buy now, pay later, customers are much more responsive to making payments because, in their mind, they’re tying the payment to whatever it is that they bought. However, when they buy that exact same thing with a credit card, emotionally, they’re not paying for that item—they’re paying their credit card,” said Rhett Roberts, CEO of LoanPro, a loan software company that has studied consumers’ emotional connection to BNPL services versus credit card payments.
Credit card installment plans
With the rise of independent BNPL companies, credit card issuers and brands are following suit with installment plans of their own.
American Express Plan It
Plan It is a program from American Express that allows you to choose up to 10 qualifying credit card purchases of over $100 that you can break up into monthly installments.
You’ll be shown three different term options that include the monthly payment, how many months you have to pay it off and any associated monthly fee based on the size of the purchase and your credit history. You also have the option to roll all ten purchases into one separate balance and pay that in installments as well.
Plan It is bundled with another program from American Express, Pay It, which offers the ability to pay off small purchases of under $100 throughout the month, reducing your total balance.
Citi Flex Pay
Citi offers an installment plan service called Flex Pay. Qualified Citi cardholders can either choose an eligible item they’ve already purchased or select Flex Pay when using their Citi credit card at checkout on Amazon. The terms of each plan offered, including duration, minimum payment and separate interest rate charged are disclosed when you select Flex Pay.
Visa Installments is a Visa plugin available at checkout at select participating online retailers. It allows you to pay for purchases in equal monthly installments. If the retailer is offering it and it’s available on your card, you can select your plan at checkout before completing your purchase. Currently, Visa only lists four retailers that are participating: Awara, The Room Place, 42nd St. Photo and Tire Agent. Just one credit card issuer (Commerce Bank) is offering Visa Installments on its cards.
Not to be outdone, Visa’s biggest competitor is launching its own BNPL plugin in Q1 of 2022. With Mastercard Installments, Mastercard issuers will invite their customers to sign up with their existing cards. The terms of the payment plan offered (timeframe, payment amount, whether interest is charged) will be set by the issuer. The offers will be presented to the cardholder either at the payment terminal or at checkout, and they can make their selection.
Apple Card monthly installments
The Apple Card offers monthly installments when you use it to pay for Apple products at Apple.com, the Apple Store app or a physical Apple Store. The time frame can be as long as 24 months with no interest, and the selected plan can be viewed in your Apple Wallet. With Apple Card, your monthly installment payment becomes integrated into your minimum credit card payment.
“If you’re looking to delay payment by a month or two, you put it on your credit card, but people who are looking for buy now, pay later services are looking for extensions beyond that,” says Marwan Forzley, CEO of Veem, a payment platform that offers flexible payment options for businesses, including a BNPL installment option for their bills.
Independent BNPL services
If you’re looking for a more flexible payment option than what’s offered by traditional credit cards, there are plenty of independent BNPL platforms out there. However, your options often depend on which services the online retailer behind your purchase partners with. Here are the leading services you’re most likely to find.
Founded in Stockholm, Sweden in 2005, Klarna is the BNPL market leader and is usable at any online retailer if you use the Klarna for Chrome browser extension. You’ll also see it as a payment option at checkout from certain retailers like H&M, Adidas, Sephora, Macys and Saks Fifth Avenue. There’s an app if you prefer to do your online shopping on your phone.
“We firmly believe that most of the time, people should pay with the money they have, but there are certain times where credit makes sense,” said David Sykes, Head of North America, Klarna. “In those cases, our buy now, pay later products offer a sustainable, interest-free form of credit, which is a much healthier alternative to high-cost credit cards.”
Klarna offers two interest-free payment options, Pay In 4 (you pay a fixed price in four installments every two weeks) and Pay In 30 (you pay the full amount in 30 days). There are also monthly installment options from six to 36 months, but you might be charged interest on those.
In the event that you’re late on interest-free payments, Klarna may charge fees of $7.00 (but never more than 25 percent of an item’s value). On installment plans, fees can be as much as $35, and on all plans, missed payments are rolled into the next one.
According to Cardify, Affirm has the highest average spend per user at $130. Founded in 2012 and based in San Francisco, Affirm offers its BNPL service at checkout for a number of online retailers, including Pottery Barn, Neiman Marcus, Peloton and Expedia.
When you select Affirm at checkout, plans of four months or less are interest-free, but any time frame beyond that does charge interest—as much as 30 percent. Affirm doesn’t charge fees for late payments, but it does damage your credit score when you’re late or miss a payment.
In Affirm’s app, you can make payments, check due dates and shop with brand partners. They’ll also be launching a no-fee credit card that allows any purchase to be split into installment payments.
Zip (Formerly QuadPay)
In August 2021, the Sydney, Australia-based BNPL platform QuadPay rebranded as Zip. According to Cardify, it shares the highest average spend with Affirm at $130 and offers the opportunity to pay for online purchases in four equal installments over six weeks, interest-free.
Zip doesn’t charge fees but notes that some merchants using its platform might. Merchants that use Zip include Nike, Best Buy, Walmart, Target, Macys, Amazon, Zara and more. Like Affirm and Klarna, Zip has an app that allows you to track your payments and shop products from their retail partners.
Afterpay is the former market leader that recently lost market share to Klarna. Founded in 2014, Afterpay is another BNPL platform that started in Australia. Just like Zip, you make four installment payments over six weeks interest-free.
If you’re late with a payment, you will incur a late fee of $10 and an additional late fee of $7 if payment isn’t made within 7 days. Too many late payments and your account will be suspended until all late fees are paid. How you respond to payment will affect what payment plans you are offered in the future.
Afterpay also has an app to help you track upcoming payments and shop with their partner brands like Crocs, American Eagle, Sunglass Hut, Bed, Bath and Beyond and Aldo.
Pay in 4 and PayPal Credit
Pay in 4 and PayPal Credit are the two BNPL options offered by PayPal. Pay in 4 allows customers to pay in four fixed installments every two weeks with no interest. PayPal Credit is a financing option that allows you to pay for online purchases greater than $99 in installments for up to six months without paying interest.
You can set up automatic payments or pay manually through your PayPal account. PayPal Credit is always subject to credit approval.
Pros and cons of BNPL services
There are positive and negative aspects to paying for purchases in installments in a BNPL arrangement.
- Receive items right away without having to pay upfront
- More accessible for credit newcomers since credit checks are often not required
- Many plans are interest-free (for a limited time)
- Generally, no fees unless payments are late
- Some platforms offer apps to track your payments and shop for deals with affiliated retailers
- Generally, it’s a better financial habit to pay for things in full and upfront
- When interest is introduced, it’s generally higher than on a credit card
- Once a payment is missed, fees can be higher than on a credit card
- Difficult to track spending if you’re paying for multiple items on different installment plans
- BNPL services don’t usually report to credit bureaus unless you default, so they can’t help your credit score but can hurt it
“It’s never a good idea to spread out purchases just because you can,” says budgeting expert Andrea Woroch. “Don’t lose track of what you’re spending and don’t put yourself in a predicament of not being able to make your payments. However, if you are planning on making a big purchase you would like to use now, installment payments can be an alternative to saving money and will help you get what you need more immediately, but this should only be reserved for evaluated purchases.”
BNPL alternative: 0% APR credit cards
Another way to obtain an interest-free extended payment window is to use a credit card that offers a 0 percent introductory APR. The best zero-interest credit cards offer 18 months or longer before the regular interest rate kicks in. Plus, you can build credit and earn rewards for your purchases—a perk you won’t get with traditional BNPL services.
Here are a few of the best zero interest credit card offers on the market right now:
- U.S. Bank Visa® Platinum Card: 0% intro APR for 20 billing cycles on purchases, then 14.49 percent to 24.49 percent variable
- Wells Fargo Reflect℠ Card: 0% intro APR for up to 21 months from account opening on purchases, then 12.99 percent to 24.99 percent variable
- Citi Custom Cash℠ Card: 0% intro APR for 15 months on purchases, then 13.99 percent to 23.99 percent variable
The bottom line
If you’re looking for an extended time period to pay for a purchase interest-free, a BNPL platform is probably best. This is especially true for singular, big-ticket items that you truly need right away instead of putting money away to save for them.
Traditional credit cards are best for smaller, everyday purchases and anything else that you’re able to pay for outright. They’re also more beneficial in the long term because responsible use of credit cards can improve your credit score.
Be careful if you’re managing an installment balance while also having a credit card balance, as different interest rates and fees may apply.