Buy Now Pay Later: What What You Need to Know

If you’ve done any shopping online recently, you’ve probably encountered the option to “buy now, pay later” at checkout. Klarna, Afterpay, and Affirm are just a few of the apps offering to split online purchases into multiple payments. They boast automatic deduction, no interest and no hard inquiry to the shopper’s credit report. But, like any form of credit, buy now, pay later apps have some risks.
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Buy Now Pay Later Shopping

If you’ve done any shopping online recently, you’ve probably encountered the option to “buy now, pay later” at checkout. Klarna, Afterpay, and Affirm are just a few of the buy now pay later apps offering to split online purchases into multiple payments – usually four – and automatically deduct them from your bank account. They boast no interest and no hard inquiry to the shopper’s credit report. 

This specific form of credit and lending has been around in the United States for about five years, the U.S. Consumer Financial Protection Bureau said. But, the attention and prevalence of companies offering it only increased in the last few years.

Klarna announced its 20 millionth U.S. customer in August 2021, marking a 17.6% increase in four months. In an Aug. 19 release, Afterpay said buy now pay later spending has increased 230% among Americans since January 2020, “compared to a 43% increase for debit and an 8% increase in credit card spending.”

Buy now pay later apps are particularly popular with millennials and Gen Z, according to Jim Rice, Assistant Director for the CFPB’s Office of Servicemember Affairs. He said consumer shifts to online shopping during the Covid-19 pandemic have further heightened interest. 

How to Use Buy Now Pay Later Responsibly

  • Make a budget you can stick to.

Although buy now pay later amounts seem small, multiple purchases can add up to surprising deductions when payments come due.

  • Be aware of the rules and fees associated with buy now pay later apps: 

Buy now pay later apps tout no interest or financing fees, but that may change if a payment is late or missed. Be aware of when they can make a report to your credit and when they will assess fees. Conversely, making payments on time will not help to build your credit.

  • As with all debt, make your payments on time. 

BNPL can be harmless – and even beneficial – for shoppers who do not overspend and make their payments on time. Using the apps responsibly can help you avoid interest rates a credit card or other loan might carry without impacting your credit score.

  • Be aware of your protections as a service member.

Depending on the way the buy now pay later loan is structured, it may be subject to the guidelines of the Military Lending Act, which generally says interest cannot be more than 36% on a loan, to include other fees associated with the loan, or the Servicemembers Civil Relief Act, which provides extra financial and legal protections to service members.

For help with credit and debt, service members can visit their installation’s Personal Financial Manager or find a Personal Financial Counselor through the Department of Defense’s Office of Financial Readiness.

Buy Now Pay Later Risks and Drawbacks

Mark Steffe, President and CEO of First Command, a military finance company, called buy now pay later services “temptations” for many clients. 

“These temptations can become big impediments to developing positive and disciplined financial behaviors,” he said. 

According to a recent survey by Qualitrics and Credit Karma, 38% of American buy now pay later customers have missed at least one scheduled payment. Nearly 75% of customers who missed a payment noticed a drop in credit score.

In addition to lower credit scores, many of these services assess late fees. Amounts vary by company and state regulations, but they range from flat fees to percentages of each installment. In general, the maximum total interest would be 25% of the total purchase.

As with any financial product or service, experts recommend maintaining figuring split payments into your budget to avoid surprise charges.

Can Buy Now Pay Later Apps Build Your Credit Score? 

The CFPB can’t account for buy now pay later service usage because many BNPL companies don’t conduct hard credit inquiries. 

The services usually haven’t shown up on credit reports. So, using buy now pay later responsibly won’t build your credit score, but missing a payment could hurt it, Rice said.

That may soon change, as the three major credit bureaus (Experian, Equifax and Trans Union) plan to include BNPL loans in their credit reports. Equifax announced it would begin reporting BNPL loans in the first quarter of 2022. Experian and Trans Union will also begin reporting them, but in a separate section of their reports–at least for now.

Buy Now Pay Later and the Military  

Service members use debt differently than the civilian population, according to a July 2020 CFPB report. It also said that military members’ debt use is also dependent on the length and timing of their service. 

“Compared to civilians, service members [between ages 18 and 24] are more likely to have an auto loan or a credit card, slightly more likely to have a mortgage, and less likely to have a student loan or a third-party collections account,” the report said. 

Military members make more online purchases when they’re deployed, or on active duty in remote locations, according to Laura Udis, payday and small-dollar lending program manager at CFPB.

In July 2021, the CFPB and the Department of Defense Office of Financial Readiness published a blog post on buy now pay later services in July 2021, after the CFPB found that 18- to 24-year-old service members had higher use of credit and revolving debt than that same age group in the civilian population. 

The blog pointed military members to financial protection resources like JAG legal assistance and the local state attorney general’s office. 

DOD can’t specify if BNPL services have had a direct impact on service members because the financial readiness office does not monitor how service members use individual credit products, Kim Myers, a financial readiness program analyst for DOD’s deputy assistant secretary of defense for force education and training said in an email.

“Buy now pay later credit products and other emerging FINTECH issues are, and remain, on the Department’s ‘radar’ to ensure the Department’s financial literacy efforts remain current and relevant to address such emerging areas with factual and unbiased education that may impact members and families’ overall financial well-being,” Myers said. 

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