Is buy now, pay later too good to be true?

You’re looking to refresh your living room—the sofa has seen better days, and you’d love to have a larger TV to host movie night with friends. After a lot of research, you land on the items you want and are ready to pull out the credit card. But as you reach the checkout page, you notice you can pay with buy now, pay later (BNPL).

The offer is interest-free, and you can pay off your purchases over several installments. But is it too good to be true? 

In some cases, BNPL can be a lifeline. In others, it could end up being worse than you expected. We’ll explain why.

What is buy, now pay later?

Think of buy now, pay later (BNPL) as a kind of loan you can get for free. You buy an item, get it now, and pay for it later. There are no upfront interest charges, and you make small payments until your purchase is paid off.

Yes, you read that right: You’re not charged any interest. 

If you’re worried that BNPL financing is a scam, don’t be. In most cases they’re a safe way to pay for goods without impacting your budget too much. The Consumer Financial Protection Bureau (CFPB) is able to help protect consumers from unfair BNPL practices. For example, the CFPB offers guidelines to help ensure BNPL companies adhere to consumer protections similar to what credit card companies do. 

How does buy now, pay later work?

When shopping online or in store, you’ll often find the option to pay with BNPL services. In some cases you’ll be able to see what your initial payment would be as you’re browsing items. For example, you see a dress you like for $150. Underneath the price, you’ll see something along the lines of “four payments of $37.50 with BNPL provider.”

The payment schedule you’ll be offered will depend on the BNPL provider. For some, you can break down your purchase into four bi-weekly payments. Others allow you to pay each month over a certain amount of time—usually six to 60 payments. You won’t pay interest, though there could be fees, like ones for missing payments.

During the checkout process, you can choose to pay for the item in full or break it down into smaller payments using BNPL. If you go this route, you’ll be redirected to the BNPL application form or app to create an account.  

The application process is usually short. You’ll need to provide your name, email address, phone number, date of birth, address, and Social Security number. In most cases your application will be approved within seconds after going through a soft credit check (your credit score won’t be affected), and you can complete the purchase.

Instead of paying the store where you bought the item from, you’ll pay the BNPL provider. You can enjoy your purchase while paying down your interest-free loan.

Terms and conditions of BNPL services

Buy now, pay later (BNPL) services have several terms and conditions For one, each time you want to use BNPL to buy something, the provider may check your credit, though it most likely won’t impact your score. In most cases, even if you have a lower credit score, you can still secure a BNPL loan.

Although BNPL is a type of loan, your credit score may not be impacted because these companies don’t report your payment activity to the credit reporting bureaus: Experian, TransUnion, and Equifax.

You will need to be able to meet other requirements to qualify for BNPL loans, such as:

• Be at least 18 years old

• Have a bank account, credit card, or debit card

• Have a mobile phone number

Even though most BNPL providers don’t charge interest, you could still be on the hook for fees. You should receive an agreement that outlines what happens if there are any late or missed payment fees, and when you need to start making payments. There may also be a section on what happens to your BNPL contract if you decide you want to refund your purchase.

Related: 12 practical money management tips

Pros and cons of using BNPL

Still wondering how to process all the information you learned about BNPL financing? Sure, it sounds like a no-brainer to spread out your payments, but it’s not all it’s cracked up to be. It could, in fact, be too good to be true for many people. Before doing anything, look at the pros and cons so you can be an even more savvy consumer.

Pros

• Convenient shopping experience. If you’re a little short on funds this month, you can use BNPL to spread out your payments, making for a more convenient way to shop. 

• No interest charges. In comparison with credit cards and personal loans, BNPL financing may cost less because you don’t have to pay interest. 

• No credit score requirement. Even though BNPL providers check your credit, it doesn’t mean your application will be rejected even if your score isn’t exactly considered stellar. 

Cons

• Fees for missed payments. Some BNPL providers charge high fees if you’re late on a payment or miss it altogether. 

• Payment activity not reported to credit bureaus. If you’re looking to build or maintain your credit score, your payment to BNPL providers won’t get reported. Even if you pay on time, you won’t see an impact on your credit score. 

• Potential overspending. The allure of BNPL is real, especially since you can borrow money without paying interest. Budget carefully to make sure you don’t land in hot water with too many BNPL loans. Our 2024 survey showed that over three-in-four (78%) consumers acknowledge BNPL loans could make it easier to get overextended financially.

• Many debt-stressed consumers use BNPL as a last resort. Our survey also found that BNPL can be the credit product of last resort for people with poor credit, are near the limit of their credit cards, or who are otherwise already overextended financially. For people who are already struggling with high levels of debt, using BNPL could be a sign of debt stress that puts them at risk of a BNPL debt spiral.

 What's next

• Check your budget carefully (consider using a money management app like Achieve MoLO) to see if you can make all the required BNPL payments on time.

• Read the fine print to see if you could be charged fees, or other things you’re responsible for if you’re late on your payment or want to return the item you bought.