What is buy now, pay later and should you take advantage of it?

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Several easy installments?

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Making a big purchase online can feel unmanageable, considering you either have to part with your money all at once, or you have to pay with money you don’t (yet) have. One trend that’s made it easier to buy what you want immediately is buy now, pay later (BNPL).

What is buy now, pay later? It’s just what it sounds like—a way to make your purchases now and pay them off in installments over time. Like many forms of debt, BNPL can be great if it’s used wisely and sparingly, but can turn your financial goals upside down if it’s not done right.

Buy now, pay later represents a short-term, interest-free loan. You’re most likely to see it offered when you check out online, although some BNPL apps also allow you to pay at the cash register at a brick-and-mortar store.

With BNPL, you purchase the item, then make regular installment payments until it’s paid off.

Different buy now, pay later companies offer various terms, often ranging from six weeks up to 18 months. Some BNPL companies might check your credit, while others don’t worry about it. And some providers let you choose a longer repayment period, but charge interest for longer plans.

Some of the common buy now, pay later companies you’re likely to encounter include:

Websites add BNPL options to encourage people to make larger purchases without feeling as though they’re going deep into debt. And BNPL services have increased in popularity; the Consumer Financial Protection Bureau (CFPB) reported their use increased tenfold between 2019 and 2021.

The buy now, pay later process is fairly straightforward. When you visit a website and want to make a purchase, you’re likely to see different payment options. You can pay for the item outright using your credit card or a payment processor like PayPal. But, increasingly, you may also see a BNPL company offering the option to pay in four installments.

If you choose the BNPL option, you’ll fill out a quick application form. You’re usually prompted to provide bank account or credit card information so you can set up autopay for your installments.

Once your BNPL application is approved, you can complete your purchase. For “pay in 4” BNPL arrangements, you make your initial payment immediately, at the time of purchase. The remaining payments are made every other week. The total term of the loan is usually six weeks.

As long as you make your payments as agreed, you don’t have to worry about interest charges or late fees. Sounds like a good deal, right? You get manageable payments without worrying about interest. Unfortunately, there are some downsides to BNPL.

Don’t assume that BNPL is the unicorn payment arrangement you’d like it to be. Sure, as long as you make your payments on time and you pay off the loan in four installments, you don’t have to worry about interest or fees. It’s also popular among younger consumers because it doesn’t require you to have a credit history.

Before you get too excited, though, it’s important to understand some of the downsides.

Buy now, pay later can be a savvy arrangement if you use it once or twice to make large purchases more manageable. And as interest rates have risen in the post-pandemic economy, an interest-free loan—if it allows you to keep more money in interest-bearing accounts for a few weeks—is like a bonus.

However, as with any debt, you run the risk of getting in over your head. If you’re trying to stay within a monthly budget, remember that a BNPL purchase is not free money. Deferring payments may help this month’s budget, but you might find yourself running short in a month or two.

Plus, if you’re trying to raise your credit score, BNPL purchases might not help. And if you aren’t careful, you could rack up hefty fees and interest charges.