‘Buy now, pay later’: This is 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 struggle with the total? While it’s wise to spend within your budget, if you need to make a purchase that you want to charge or borrow money for, a “buy now, pay later” service might be a wiser option.

BNPL companies like Affirm, AfterPay, Klarna and PayPal’s Pay in 4 offer you micro installment loans. This loan covers the cost of your purchase immediately and allows you to repay the balance over time. These services have grown in importance since the pandemic, and today AfterPay has more than 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 do they differ from credit cards and personal loans? Here’s the breakdown of these alternative financing options and how to use them.

What are Installment Services?

If you’ve ever bought a car, home, or an education, chances are you’ve used an installment loan before. Installment loans are lump sum loans that you pay back over a set number of months or years. For products like cars and houses, they are often financed by well-known banks like Chase or Wells Fargo.

Mini installment plans from companies like AfterPay and Affirm act like microcredits for everyday purchases like clothes, makeup, electronics, and more Fitness equipment (like Peloton). For example, Affirm also supports unexpected purchases, like car repairs through Vermin Club. But unlike new car or home loans, which you typically pay off over many years, products and services funded through these services typically pay off in a matter of weeks or months.

How do you work?

Each online installment plan offers different configurations, but the gist is, you buy your item now, select the plan at checkout at a qualifying retailer, create an account, and complete your purchase. With Klarna and AfterPay you receive your goods immediately and then pay for them in four installments: one at check-out 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.

You will not be charged any late fees for AfterPay as long as you make your four payments. Klarna has different payment options and some of them charge interest. Affirm charges 0-30% interest depending on your payment plan.

To benefit from an interest-free installment plan, you need to shop from retailers that support it. For example, Anthropologie, DSW and Fenty Beauty are partners of AfterPay. When viewing a product, you may see the installment service’s logo letting you know the partnership is in place and allowing you to select a payment plan at checkout. From there you usually pay the first installment and the next one comes around two weeks later. Otherwise, the product or service will arrive on time, just like paying in full at the checkout.

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

Although they are not like traditional loans, they are different from other types of alternative payment methods. For example:

  • It’s not credit cards. A credit card is a revolving line of credit that you are approved for. You use your card to pay for your purchase in full, and at the end of the billing period you settle your bill or make payments until you have paid it in full. If you do not pay your balance at the end of the billing cycle, you will typically incur interest, which can be 20% or more. CNET always recommends Pay off your loan in full.
  • They are not the same as layaway. Layaway is when you agree to pay off an item over the course of a few months and once you’ve paid off it, you can take it home. Layaway usually requires an upfront payment and a service fee, and you won’t receive your goods until you’ve paid for them in full. Some installment companies require payment upfront, but you don’t have to wait to receive your item. You get it right away.

How does an installment payment service affect my credit score?

When you apply for a loan or credit card, this tough credit check will examine your credit history to see if you are credit conscious enough to lend. There is no hard credit request with BNPL apps. When the app checks your creditworthiness, it is a gentle credit check that does not harm your creditworthiness. The Services do not provide the credit you need to shop with them.

If you are not diligent when making payments, your creditworthiness may be affected. Most micro installment loans require you to make payments about every two weeks and in four installments total. So if you don’t pay your bill on time, this triggers a default for some companies. The big three credit bureaus will be notified and you could see your credit score drop. Late payment is one of the biggest factors in Determining your creditworthinessand a decline that could affect 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 these fees do not exceed 25% of the purchase amount. Klarna does not charge a late fee, but if you do not make a payment when it is due, use of the website and app may be blocked in the future. None of these services charge prepayment fees, so you won’t be penalized for paying back your balance earlier.

Should I use BNPL services?

It depends on what kind of buyer you are and your attitude towards money. 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 items you need or want to purchase, you are not required to pay full price at checkout. With micro installment loans, you can pay off your purchase over a few weeks.
  • You don’t need great credit to be approved: Most services do a gentle credit check, which will do you no harm credit-worthiness
    . 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 credit card: If you’ve had 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, while if you want a credit card or a loan, you’ll have to wait a few days before you can use that balance.


  • You might think you’re spending less: If you cringe in front of a $1,000 couch and see the payments split up to say $250 every two weeks, you’ll think you’re paying less for an item. In reality, you are still paying the same amount and borrowing money for it.
  • You may be charged interest or other fees Fees: Depending on the service you choose and the repayment plan you choose, you may be charged interest. For example, Affirm offers interest rates ranging from 0% to 30%. While that interest doesn’t add up like a credit card, spreading the payments on that $1,000 couch over 12 months at a 30% interest rate could end up costing $169.76 in interest alone.
  • You may not be approved for the full amount: Your credit rating may not preclude you from being approved for a BNPL loan, but it is still a factor in determining your loan amount and interest rate (if applicable). That means there’s a chance you might not get the full amount you’re applying for.
  • It’s still a loan: Remember, you’re still taking out a loan even if you pay it back sooner than you would with a traditional loan. Failure to pay on time may result in interest charges, late payment fees, or future inability to use the Service.

While the convenience of late payment sounds tempting to get something now, you’re still on the hook to pay your bill in full. If you need something now but can’t afford it, micro installment loans might be a good idea. But if you think you can’t afford payments, you should consider another payment method or wait until you have cash on hand to make your purchase.

Correction, April 30th: Affirm has 8.7 million users, more than previously reported. It also has repayment options from three to 12 months, a shorter period than we’ve listed previously. Clarified that AfterPay does not charge late fees as long as you make four payments.


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