“Buy now, pay later”: how Affirm, Afterpay, Pay in 4 from PayPal and Klarna work

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How many times have you added items to your online shopping cart only to balk altogether? While it’s a good idea to spend within your budget, if you need to make a purchase for which you plan to charge or borrow money, a “buy now, pay later” service might be an option. smarter.

BNPL companies like Affirm, AfterPay, Klarna and PayPal’s Pay in 4 work by offering you micro installment loans. This loan covers the cost of your purchase immediately and allows you to pay off the balance over time. These services have gained traction since the pandemic and today AfterPay has over 16 million active users, followed by Affirm’s 8.7 million, most of whom are millennials and Gen Z shoppers.

But what are these installment plans and how are they different from credit card and personal loans? Here is the breakdown of these alternative financing options and how to use them.

What are Payout Services?

If you’ve ever bought a car, a house, or an education, you’ve probably used an installment loan. Installment loans are lump sum loans that you repay over a number of months or years. For things like cars and homes, they’re often financed by well-known banks, like Chase or Wells Fargo.

Mini-payment plans from companies like AfterPay and Affirm act like microloans for everyday purchases, like clothes, makeup, electronics, and gym equipment (like Peloton). Affirm, for example, also supports unexpected purchases, like car repairs through YourMechanic. But unlike new loans for the purchase of a car or a house, which you generally repay over many years, the products and services financed by these services are generally paid off in a few weeks or months.

How do they work?

Each online installment plan offers different setups, but the gist is this: you purchase your item now, select the plan at checkout from an eligible retailer, create an account, and complete your purchase. With Klarna and AfterPay, you get your goods immediately, then pay for them in four instalments: one at checkout and usually every two weeks or once a month thereafter. Affirm has payment options that typically range from three to 12 months, although some plans have terms of up to 48 months.

For AfterPay, as long as you make your four payments, you won’t be charged late fees. Klarna offers different payment options and some of them charge interest. Affirm charges 0-30% interest depending on your payment plan.

To take advantage of an interest-free installment plan, you must shop with retailers that support it. Anthropologie, DSW and Fenty Beauty are for example AfterPay partners. You may see the installment service logo when viewing a product, letting you know that the partnership exists and you can select a payment plan at checkout. From there, you’ll usually pay the first installment, and the next one will come out about two weeks later. Otherwise, the product or service will arrive on time, as it would if you had paid in full at checkout.

You can also shop through each company’s app. Affirm, AfterPay, PayPal and Klarna all have apps in the App Store and Google Play that allow you to shop, monitor your orders and make payments.

Although they don’t look like traditional loans, they are different from other types of alternative payment methods. For example:

  • These are not credit cards. A credit card is a revolving line of credit that you get approved for. You use your card to pay for your purchase in full, then at the end of the billing period, you pay your bill or make payments until you pay it in full. Generally, if you do not pay your balance at the end of the billing period, interest will accrue, up to 20% or more. CNET always recommends repay your loan in full.
  • It is not the same as layaway. Layaway is when you agree to pay for an item over the course of a few months and once you’ve paid for it, you can take it home. Layaway typically requires an upfront deposit and a service fee, and you don’t receive your goods until you’ve paid for them in full. Some installment plan companies require an initial deposit, but you don’t have to wait to get your item; you get it right away.

How does a remittance service affect my credit rating?

When you apply for a loan or credit card, this in-depth credit check looks at your credit history to see if you’re responsible enough credit to lend. With BNPL applications, there is no firm credit demand. If the app checks your credit, it will be a soft credit check, which will not hurt your credit score. The services do not specify the credit score you need to shop with them.

If you are not diligent with payments, your credit score could be affected. For most micro installment loans, you need to make payments approximately every two weeks and in four installments in total. So if you don’t pay your bill on time, it triggers late payment for some companies. The three major credit bureaus will be notified and you may see your credit score drop. Late payments are one of the main factors of determine your credit score, and a drop that could hurt your chances of borrowing money in the future.

Penalties and fees vary by company. Affirm and PayPal do not charge late fees. AfterPay does this, although this fee does not exceed 25% of the purchase amount. Klarna does not charge late fees, but if you do not make a payment when due, you may be prevented from using the site and app in the future. None of these services charge prepayment fees, so you won’t be penalized for paying off your balance early.

Should I use BNPL services?

It depends on what kind of buyer you are and your money mindset. Here are some pros and cons to consider:


  • You can buy items and services, even if you can’t afford them right away: If you have things you need or want to buy, you don’t have to pay full price at checkout. Micro installment loans allow you to pay for your purchase in a few weeks.
  • You don’t need great credit to be approved: Most services perform a soft credit check, which will not hurt your credit score
    . If you don’t have good credit or a long credit history, this is a good alternative payment option.
  • It’s easier than a loan or a credit card: If you have trouble with credit cards or don’t like using them, this is an easier method than applying for a credit card or personal loan. You can apply at the cashier, whereas if you want a credit card or a loan, you will have to wait a few days before you can use these funds.

The inconvenients

  • You might think you’re spending less: If you cringe at a $1,000 couch, seeing payments split into $250 every two weeks, for example, makes you think you’re paying less for an item. In reality, you always pay the same amount and borrow money to do so.
  • You may be charged interest or other costs: Depending on the service you choose and the repayment plan you select, you may be charged interest. Affirm, for example, offers interest rates between 0% and 30%. While that interest doesn’t accrue like a credit card, spreading the payments for that $1,000 couch over twelve months at 30% interest could end up costing you $169.76 in interest. only.
  • You might not be approved for the full amount: Your credit score may not prevent you from getting approved for a BNPL loan, but it is always a factor when determining your loan amount and interest rate (if applicable). This means that you may not be approved for the full amount you are requesting.
  • It’s always a loan: Remember that you are still taking out a loan, even if you pay it off sooner than you would with a traditional loan. Failure to pay on time could result in interest charges, late payment fees, or the inability to use the service in the future.

While the convenience of deferred payment sounds appealing as a way to get something now, you’re still obligated to pay your bill in full. If you need something now but can’t afford it, micro installment loans can be a good idea. But if you don’t think you’ll be able to pay, you can consider another payment method or wait until you have cash in hand to make your purchase.

Corrigendum, April 30: Affirm has 8.7 million users, more than we quoted above. It also offers repayment options ranging from three to 12 months, a shorter period than the one we previously listed. Clarification that AfterPay does not charge late fees as long as you make four payments.

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