What’s the catch on Buy Now, Pay Later?

Anyone shopping online in the last few years has likely noticed the explosion of Buy Now, Pay Later options for completing their purchase. The pay-in-installments offer has now spread widely to in-store shopping as well, enabling consumers to buy almost anything with just a down payment.

The Buy Now, Pay Later model originated in Australia and Scandinavia, and landed on U.S. shores around 2015. But it really picked up steam during the pandemic, when online shopping for just about everything reached a fever pitch.

There are a number of BNPL providers, such as Affirm, Afterpay, and Klarna, and almost all of them offer a simple “pay in four” model that is interest-free. The way it works is that you pay one-quarter of the purchase price immediately, and then you’re charged three equal installments, one every two weeks. You can have the installment payments charged to your bank account, debit card, or credit card.

So if these offers are interest-free, how do BNPL companies make money? Primarily, they generate revenue from the merchants themselves. Just like credit cards charge stores a small percentage of every purchase made with their card, BNPL providers charge the merchants a percentage as well, though the fee is much higher than for credit cards.

In addition, many BNPL providers charge fees if you miss a payment or make it late. Many also offer longer-term financing options, with monthly payments over 6 months, 1 year, etc. These longer installment plans do charge interest, and it can be hefty.

Since it’s possible to use BNPL and pay no interest or fees at all, the biggest catch to consumers may be how tempting BNPL makes it to overspend, both by viewing purchases as less expensive than they ultimately are and by accumulating multiple BNPL debts at a time.