Buy now, pay later (BNPL) companies offer services that allow online shoppers to buy something immediately and pay for it in installments—typically without the need for the applications or hard credit checks associated with credit cards.
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The buy now, pay later industry allows consumers to buy something immediately and pay in installments without the need for lengthy application and approval processes or high credit scores—and fintech companies Affirm, Klarna, and Afterpay are leading the charge by targeting young adults.
While they're marketed as "interest-free" loans, BNPL loans often have penalties for late payments, such as late fees in varying amounts depending on the BNPL company used to make the purchase. BNPL users often pay 25% of the BNPL loan at checkout, and then pay the remaining balance in three more installments over the course of roughly six weeks, depending on the BNPL company and agreement.
Some buy now, pay later services do a soft credit check rather than a hard credit check, like credit card companies would do when someone applies for a card. While hard credit checks can impact your credit score, soft pulls typically do not.
When a merchant partners with a buy now, pay later app, consumers are more likely to spend more money with that merchant—meaning that the merchant is willing to pay a small fee in exchange for the ability for customers to pay with buy now, pay later.
While applicants typically need a good credit score and credit history to qualify for many credit cards, that's not the case with buy now, pay later loans, making them more accessible forms of payment for younger generations.
Apple rolled out its own buy now, pay later service in 2023, but Apple shut it down the following year. Instead, Apple made changes to let its Apple Pay users make purchases and access installment loans through BNPL company Affirm.
Buy now pay later loans come with some risks, such as the hefty late fees that can add up over time in the case of missed payments. However, personal finance experts say that tactics like reading the fine print can help consumers use these financial tools more safely.
Almost 24% of buy now, pay later users have missed payments, with younger users (32% of 18- to 29-year-olds) being more likely to fall behind on payments than their older counterparts (only 12% of adults 60 years of age or older had done the same).
Some people use buy now, pay later apps as an alternative to credit cards. BNPL services have a lower barrier to entry than credit cards—many frequent BNPL users have low credit scores.
The modern BNPL model didn't take off until the COVID-19 pandemic, when consumers were stuck at home and lockdowns forced them to shop online rather than in-person. The number of US BNPL loans grew more than tenfold from 2019 (16.8 million) to 2021 (180 million) in 2021, according to a Consumer Financial Protection Bureau report.
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