Buy Now Pay Later Companies


What is buy now pay later, and how does it work? See the pros and cons with these two major examples.

Buy now pay later companies are rising in popularity, especially as online shopping becomes more and more common. In fact, as of March 2021, 56% of Americans have used a buy now pay later (BNPL) service. You have likely seen some of the popular ones linked to your favorite stores—Afterpay, Klarna, and Affirm, for example. 

So what's the deal? Are BNPL companies all they're cracked up to be?

What Is a Buy Now Pay Later Company?

Buy now pay later companies are pretty much exactly what they sound like. These companies offer you a few ways to make large purchases and then spread payments out over a few months. Most BNPL programs stick to a standard of four payments, which occur every two weeks. In other words, those payments come out in the same increments as your paychecks.

Buy now pay later companies don't charge interest either. Though that doesn't necessarily mean you're getting the service for free. After all, these companies have to profit somehow, if not by interest rates, typically by way of late fees. If your automatic payment doesn't process due to a lack of funds (or your payment isn’t automated), you have a small grace period to make the payment. Otherwise, you can get charged.

Fees are generally low—however, they can stack up. This is especially true if the payments are still relatively large for your budget, or you forget about it and overspend. On the other hand, with good management, these programs can make a large purchase more digestible.

Examples of Buy Now Pay Later Companies

As mentioned above, a few examples of popular buy now pay later companies include:

  • Afterpay
  • Affirm
  • Klarna
  • Sezzle
  • Zip (previously Quadpay)

All of these companies operate off of a similar structure. And, many online stores now work directly with at least one of these companies. Depending on where you're shopping online, you may even see a pop-up telling you how much you could pay today using a buy now pay later service instead of just paying with the money you actually have.

How Does Klarna Work?

Klarna operates off of the standard four-pay model. Say you have your sights on a coat that, after tax and shipping, is exactly $400. To get your coat with Klarna, you'd only have to pay $100 on the spot to make the order. Then, two weeks later, the next $100 payment gets pulled from your account. This happens every two weeks until you've paid the full amount.

Klarna has a 0% APR, which means that, in theory, you're not paying any additional money to make the purchase this way. However, this hangs on the condition that you make each payment on time. Although the payment is automatic, having insufficient funds can throw you off schedule.

While there's a small grace period after an unsuccessful payment, a second failed payment can incur a late fee of up to $7. In addition to the popular four-pay model, Klarna also offers a 30-day pay in full option or small loans with a relatively high interest rate.

Pros of Klarna

Klarna can be beneficial if you know you have the means to pay for something and would rather break it up into increments. This can make your paychecks go further and still give you some freedom to buy things. It also allows you to make larger purchases without pulling funds from your savings account, for example.

Klarna may also be a good way for you to make important purchases without a credit card. This is good, especially if you have had a hard time opening a credit card in the past. As long as you can make payments, you can stay in good shape.

Cons of Klarna

If making payments on the items you want to buy is going to be difficult, it's best to avoid Klarna. What you don't pay in interest, you may have to pay in late fees, especially if you struggle to make each of the four payments. And because the money comes directly from your account, it could also put you at risk of defaulting on other bills or being unable to buy essentials.

If you use the pay in 30 days option and you're unable to make the full payment in that time, you could be considered in default. This can be reported to credit bureaus and impact your credit score. Finally, the loan option has late fees up to $35 and an APR of 0%-29.99%, which can get pricey quickly.

How Does Afterpay Work?

Afterpay, in many ways, operates in the same way as Klarna. In addition to four-pay and 30-day payment options, you can actually have a credit limit with Afterpay. This limit essentially dictates how much money you can use in Afterpay, though it doesn't guarantee approval on every purchase up to that limit. Instead, it's a way for Afterpay to ensure that you can't get too far in the hole.

However, this credit limit can increase with time and responsible usage, which quickly becomes tempting if you like to shop.

Pros of Afterpay

A pro of using Afterpay is that there are no credit checks to be involved. Instead, their credit limit system allows you to build trust with the company. The more you can prove your responsibility with their program, the higher the credit limit. However, this can also be a con if this tempts you to spend recklessly.

Cons of Afterpay

If you make a late payment or your payment is unable to process, you can be charged a fee of up to 25% of the total value of the purchase. Each of your payments on a four-pay plan is already 25% of the full order, which means you could be charged what amounts to a whole extra payment. If you were charged a late fee for each payment, you'd pay double the price for your purchase. That's a pretty expensive markup.

Use the Power of Buy Now Pay Later Wisely

Depending on your financial circumstance, a buy now pay later company might be okay to use. Just proceed with caution, especially if you tend to struggle to make ends meet. The late fees may not be worth the convenience. There are also buy now pay later alernatives that might be worth looking into. Ultimately, it comes down to personal preference and a good understanding of your personal money habits. Just do what’s best for you.

If you decide you'd rather have an alternative way to shop, Monorail can help. Monorail is a powered wishlist app that helps you save for the things you want. Totally guilt-free, risk-free, debt-free.

See how the Monorail Wishlist can help you shop.

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