Here's what to know — good and bad — about buy now, pay later options

Move over, credit cards. Consumers are opting for another payment method when it comes time to check out, and it often comes with 0% interest.

Retailers are partnering with services like Affirm, Afterpay, Klarna, or Sezzle to offer “buy now pay later (BNPL)” options that can ease the financial burden of larger purchases like furniture, jewelry, and home gym equipment — or even holiday shopping.

The services offer payment options that allow consumers to make purchases and pay them off in installments over six weeks or more. And unlike traditional layaway options, consumers using BNPL platforms will receive their purchases immediately.

Younger shoppers are increasingly opting to use buy now, pay later platforms this year while holiday shopping, according to a recent survey from Cardify, an organization that analyzes consumer spending data. But any consumer opting for these platforms should know the ins and outs before committing.

Here's what to know.

What are buy now, pay later platforms?

While the platforms are more commonly found online, many now offer payment options in-store, including Klarna, which recently integrated with Freedom Pay to offer in-person purchases by using a QR code on its app. Consumers only need to download the app and register before they can explore their options and generate their own unique QR code.

BNPL platforms typically buck traditional credit account terms, retail and finance expert Trae Bodge said, which attracts younger consumers.

“Consumers, especially Generation Z and Millennials, have been gravitating to these platforms for their transparency,” she said. “No upsell of loans or high interest rates, putting spending power back in the consumer’s wallet.”

The Cardify survey — which polled over 2,000 verified BNPL users — found that more than 45% of respondents planned to buy holiday gifts using a BNPL service this year. Shoppers also indicated they plan to spend more than they normally would this year, with nearly 46% of respondents admitting they would spend less if they couldn’t use BNPL platforms.

Cardify found that consumers spent an average of $100-$150 with these services in October alone.

And for some shoppers, BNPL options might be a better fit than a traditional credit card. Meaghan Brophy, a retail expert with Fit Small Business, points out that these services are often interest-free and have payment plans that span at least six weeks, if not longer, and unlike a credit card where you pay interest on a balance after a month.

“As long as you can stick to the predetermined payment plan, installment plans can be a better option than credit cards. Just make sure to stick to the payment schedule, otherwise, you may be penalized with late fees,” Brophy explained.

Afterpay doesn’t affect your credit score, and the company doesn’t report to credit bureaus if a customer misses a payment, according to Zahir Khoja, general manager of Afterpay North America, who also noteed that the platform has grown by 230% in the last year.

“We’re proud to say that 95% of transactions never incur a late fee and if a customer is late, we send them several reminders and try to work with them to collect repayment,” he said. Those who are late on payments are frozen out of the platform until repayment is made, Khoja added.

Platforms like Afterpay make their revenue from a combination of fees — from customers, platform advertising, and merchant partnerships. “Merchants pay a nominal percentage fee ranging from 4-6% to Afterpay for offering the service,” he said.

Christmas. Woman in sweater holding credit card using laptop for making order sitting at table with packaging gift near fireplace and christmas tree. Online shopping concept
Buy now, pay later platforms are giving consumers more flexibility during the holiday shopping season. (Getty Creative) (FTiare via Getty Images)

Why buyers should still watch their budgets

While 0% financing and flexible payment schedules are pluses, there are other factors that shoppers should also consider, Jonathan Treiber, co-founder and CEO of promotions marketing platform RevTrax, told Yahoo Money.

“BNPL still allows customers to overextend themselves when shopping online," he said. "So, consumers need to go into BNPL with eyes wide open and only ‘buy now’ if they are certain they can actually fulfill the ‘pay later’ end of the agreement.”

Brophy said platforms like Affirm and Klarna operate similarly, but pointed out a few key differences. Affirm often requires a credit check and may include interest depending on the size of the purchase, she said, while Klarna doesn’t accrue interest or incur fees for on-time payments. Brophy said Klarna also offers more traditional financing options, but those will require a hard credit check.

Because the major BNPL don’t often require hard credit checks, Brophy said consumers can be approved for purchases they might not be able to afford, so it’s important to keep your budget realistic.

Rick Cunningham, senior vice president of strategy and new business development at Alliance Data — a card services company with its own BNPL platform, Bread — echoes Brophy’s advice and warns consumers of taking advantage of too many BNPL options.

“BNPL makes it very easy to access the product since there’s a quick and seamless online application process with high approval rates. Thus, there’s the potential to incur too many BNPL loans, overextending yourself and your finances," he said. “As with credit cards, it’s up to the consumer to manage their money responsibly.”