Buy now pay later is a relatively new form of lending popular among e-commerce stores and other retailers that offer online shopping to consumers. Retailers that provide buy now pay later financing give customers the option to purchase a product or service in an installment agreement, which may last for a few weeks or months.

Most buy now pay later retailers do not charge interest for the financing. The company offering the arrangement typically requires a small down payment, such as 25% of the good’s price, alongside an agreement to make regular payments until the consumer repays the remainder of the debt. Consumers typically aren’t charged any interest for using buy now pay later. However, they may incur late payment charges or fees if they fail to repay on time.

What Companies Use Buy Now Pay Later?

Most major e-commerce retailers offer buy now, pay later payment plans. It’s possible to find different buy now pay later financing arrangements for clothing, home goods products, makeup, and airline tickets. 

If the organization you are shopping with offers buy now, pay later, you’ll see a notification of the option at the website’s checkout page. If you select the option, you’ll be able to view specific information about the installment plan, like how much you’ll need as a down payment and when future payments will be due.

Most retailers offer to finance consumer goods with a value of less than $1,500 using buy now pay later.

How Does Buy Now Pay Later Work?

Consumers who apply for buy now, pay later financing undergo a soft credit check inquiry before approval. The credit check does not impact their credit score or appear on their credit report. If the financing company approves the customer for the plan, they’ll need to make their initial down payment and set up future payments through their bank. 

Most buy now pay later companies do not charge interest on purchases, but they will charge fees for late payments. If you use buy now pay later to finance a purchase, it’s essential to make all your payments on time to avoid extra charges.

What Are the Advantages of Buy Now Pay Later?

Buy now pay later offers a few advantages, including:

• No interest on purchases (in many cases)
• Wide availability from online retailers
• Easy application that requires only a few minutes to fill out
• No credit score requirements

If you’re approved for buy now pay later financing, the company will ship the product you buy to you immediately. You won’t need to pay off the loan balance before receiving your purchase.

What Are the Disadvantages of Buy Now Pay Later?

While buy now pay later may sound like an excellent option for people who can’t afford to pay for their purchases upfront and want to avoid interest charges from traditional credit card lenders, it does have disadvantages.

A few drawbacks of the financing method include:

• Some plans do include interest charges and financing fees
• Companies do not report on-time repayment to the credit card bureaus
• No checks and balances to determine how much the consumer has in outstanding buy now pay later purchases
• Limited help for customer service inquiries

As is the case with all types of financing, consumers must be careful not to overextend themselves with buy now pay later purchases.

Who Regulates the Buy Now Pay Later Industry?

Both states and the federal government have responsibility for overseeing the buy now pay later industry. 

However, buying now and paying later is still a relatively new practice that most government agencies still need to study thoroughly.

In September 2022, the Consumer Financial Protection Bureau issued a full report on buy now pay later financing, including potential opportunities for improving the system. 

The report noted several concerns about the industry, including:

• Lack of consistent consumer protections
• Potential for data harvesting or monetization of customer information
• Possibility of overaccumulation of debt

Of particular concern is the potential for customers to overextend themselves through buy now pay later loans. Lenders are not required to report outstanding loans to the credit bureaus, so customers can obtain multiple loans simultaneously without the awareness of other creditors.

Holding multiple buy now pay later loans can result in a greater chance of being unable to meet repayment obligations. In addition, credit card lenders have no insight into which consumers have buy now pay later loans, which can result in approval for a credit card that the consumer cannot afford.

Is Buy Now Pay Later Worth It?

While buy now pay later has advantages, it’s generally best to avoid purchasing items you can’t afford to pay for entirely at the time of purchase, like clothing and electronics. Buying consumer goods that aren’t a necessity can lead to superfluous debt.

Consumers who haven’t built good financial habits are at particular risk. Customers who don’t understand how credit financing works, or have limited disposable income available for repayments on buy now pay later loans, may struggle to repay them according to the installment agreement.

Buy now, pay later may prove helpful for purchasing more significant home necessities, like a couch or mattress. The consumer saves on interest costs, and as long as they abide by the terms of their contract, they will save money on financing fees, compared with other options like store credit cards.

Credit Cards vs. Buy Now Pay Later: Which Is Better?

It depends. 

Credit cards are best for people who know they will pay off the balance on their next billing cycle. The creditor will report their timely payment to the credit card bureaus, which can improve their credit score. Individuals with high credit scores typically have their choice of low-interest credit cards and will qualify for the best lending products.

However, buying now and paying later is helpful for individuals who know they need extra time to pay for a purchase and want to avoid incurring interest charges on a credit card. 

Consumers who use buy now pay later must be careful to moderate their usage of the financing. Taking on too many buy now pay later loans at once may lead to difficulties meeting all your financial obligations. 

If you regularly purchase items you can’t afford to pay for in cash, it’s best to assess your spending habits. You may be over-extending yourself and buying things you don’t need.