What is buy now, pay later?

At a glance

• Buy now pay later is a short-term financing option that lets you split purchases into manageable payments, often with no interest, and no fee if paid on time.
• Buy now pay later apps/services can offer flexible payment plans, but terms and fees vary—so it’s important to read the fine print.
• Buy now pay later works by generally starting with an initial payment at checkout, followed by installment payments over a set period.

If you’ve made an online purchase lately, you’ve probably seen an option to buy now, pay later (BNPL). It can be tempting to try it out if payday is weeks away, but your mom’s birthday is this weekend. Or maybe there’s a limited-time sale at your favorite clothing retailer.

But hang tight — before you sign up for BNPL, get to know how this type of purchase could affect your budget and financial plan. We’ve got you covered with primer on how buy now pay later works and what to consider before giving it a try.

Plus, we’ll tell you how Spruce’s budgeting and savings tools can help you make managing your money easy.

How does buy now, pay later work?

Buy now, pay later is a form of short-term financing. It can be handy when you need to make a purchase, but you don’t have the money in your account at the moment.

With BNPL, you split your purchase into payments over time. For example, it could be four installments, over six weeks. You receive the item when you make the first payment, then continue with the remaining payments once every two weeks.  This is a typical pay-in-4 schedule.

For example, if you buy a pair of headphones that cost $200, you can use a buy now, pay later program to pay just $50 and receive the headphones today. Then you’ll pay the remaining $150 in three $50 installments over the next one and half months.

How services like Afterpay, Klarna, and Sezzle work

To use some buy now, pay later apps/services, you’ll likely follow the same general set of steps:

1. Look for BNPL options at checkout. A growing number of online retailers use BNPL, including popular clothing retailers, hotels, airlines, and grocery stores. The services they use may vary from company to company.

2. Apply for the BNPL loan. When you apply for financing, you may be asked to sign up for an app and you’ll be asked to provide information such as your date of birth, cell phone number, and the bank account that will fund your payments.

3. Check out the terms and conditions. Check out the interest rates and late fees of the loan before you enter your information, if you can, to make sure the terms make sense to you. Late fees also vary by provider. If everything looks good—meaning you can pay on time and are comfortable with the interest rate and fees terms—you can agree to the terms of the BNPL loan and complete the purchase.

4. Start making payments. The first payment typically is due at checkout or within two weeks. To avoid late fees and potentially damaging your credit, be sure to make future payments on time for the length of the loan.

Buy now, pay later: Pros and cons

Wondering whether buy now, pay later is right for you? Here’s a look at some of the pros:

• Buy things right away. Even if you don’t have enough money for a particular purchase now, you can buy it anyway and make smaller payments over time.
• No interest or fees (if you make all payments on time). Many buy now, pay later services offer 0% financing, meaning you’ll pay no interest. Woohoo! This means financing your purchase can stay affordable. And you often won’t have to pay any fees for using these services if you make all the payments on time. Triple check the fine print to make sure you understand what the rules are for the service you’re using.
• You may not need a credit check. Some BNPL services don’t require a hard pull credit check, which can lower your credit score. What’s more, you usually don’t need a high credit score to qualify. 
• It may help build your credit. Fair Isaac is releasing a new version of FICO score to consider BNPL trades. Your on-time BNPL payments would help your credit score if the BNPL provider reports the loan. Currently only Affirm is committed to reporting all its BNPL trades.

Before you feel completely sold on BNPL, weigh the possible disadvantages as well:

• You’ll owe late fees if you miss payments. Nearly all BNPL loans charge late fees for missed payments. These extra charges can add up fast, quickly causing your purchase to become a budget buster.  
• It might hurt your credit with a missing payment. Your BNPL providers may report the missed payments to the credit bureau, which may impact your future credit score – if the score considers BNPL information – and your ability to obtain credit.  
• Loans can be hard to track. If you have multiple BNPL loans, it can be challenging to stay on top of them. You’ll need to channel your inner Virgo and get extra organized to avoid running unexpectedly low on funds or overdrafting your bank account.
• Returning items can be complicated. When you return something bought with BNPL, the refund goes to them first. It’s then up to them to put money back into your account — and that can be slow. Until the BNPL company processes your return, you could still be on the hook for making payments.

BNPL alternatives

Saving and budgeting can help you avoid overusing BNPL. One of the benefits of a savings account is that you can proactively plan for bigger purchases. The Spruce mobile banking app can help you save and budget for purchases to help you stay on track financially.

If you’re not bringing home big bucks, it might feel hard to save money on a low income. But you’ve got this!

A personal budget can give you a clearer picture of where your money is going to help you gain control of your spending and saving. Wondering where to start? Consider trying a pay yourself first budgeting method to make sure you set money aside for the important things you want to save for.

Questions to ask yourself before you choose BNPL

Short-term financing can make it easy to overspend and dig yourself into a hole. Use it strategically and before clicking the BNPL option at checkout, ask yourself:

• Do you need it or just want it? Consider whether the item you’re about to buy is something you need urgently or something that could wait until you save up for it.
• Does the payment fit into your budget? Can you afford to make regular payments to avoid late fees?
• Have you used BNPL recently? It’s smart to budget and save for most purchases and only use BNPL for things that truly can’t wait.

Saving, budgeting, and spending: How Spruce can help

Ready to take control of your money and start building healthy money habits? Check out Spruce’s personal finance toolkit, including:

• A budgeting tool. The budget tracker tool automatically categorizes your transactions and lets you choose which areas to keep a closer eye on by setting up a  Watchlist. Want to make sure your takeout ordering habit doesn’t get out of hand? Track this category to gain a complete picture of your spending.
• Saving goals. When you sign up for Spruce, you can set up two saving goals to get started on saving for the things you want. You can use the goals to tuck money away for big or small purchases. For example, set a “fit refresh” goal so you have the cash for a wardrobe update when the new season rolls around.
• Earn high-yield interest on your savings. With Spruce, you can earn 3.50% APY^{Disclaimer number12. Go to disclaimer for more details.} on every penny you save—helping your money go farther.

Start an account with Spruce today

Juggling payments, financing, and credit can be a hassle, but your finances don’t have to be so complicated. Spruce has your back with handy tools that simplify your life and make it easier to manage your money.

Get started with Spruce today!

This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.