Buy now, pay later loans are becoming more popular. Here's what to know
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Have you seen that pay in installments option when you go to pay for something online? It's called Buy Now, Pay Later. If you're not familiar, Buy Now, Pay Later loans are a service offered by financial technology companies like Klarna, Afterpay, and Affirm. These loans are an alternative to credit cards, another way to borrow money to buy something. Though, unlike with a credit card, when you use Buy Now, Pay Later, you typically won't pay interest on your purchases.

Retailers partner with these buy-now-pay-later companies to offer you this service because, well, they think having this option will encourage you to buy more stuff. And there's evidence that it will. Buy-now-pay-later loans are popular, by the way. At this point, one in five shoppers has used them to make a purchase, according to the Consumer Financial Protection Bureau. Maybe you're one of those shoppers. Do you know what you're signing up for when you choose this option?

LifeKit reporter Andy Tagle has been digging into this topic, and on today's episode, we talk about the upsides and the risks of using Buy Now, Pay Later. She'll explain how these companies make money and what advice experts have if you're going to use these services. This message comes from EarthX. To advance the latest sustainability solutions, EarthX 2025 returns to Dallas, Texas.

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Andy, why might someone use Buy Now, Pay Later? So there's lots of reasons why people like Buy Now, Pay Later loans. The first reason is access, right? It gives a really large chunk of the population access to credit that didn't have access before. So people who don't have a great credit score, for instance, or don't have a relationship with a bank? Yeah. So young people or people who don't have good credit, exactly. Okay. The

The second thing is that buy now, pay later loans are super easy to use. The tech is really nimble and fast. It's really convenient. Another thing is, in most cases, it's an interest-free loan. So a typical plan is four payments stretched over six weeks. So you get a little more time even than you would for a credit card bill. So it can help you stretch your money. It can help make you more liquid. And that's a big deal for a lot of people.

Okay. Anything else people like about these? Yeah. And then I would say another reason why these buy now pay later loans are so popular is the one and done feature. So when you sign up for a credit card, if you are approved for a credit card, you're signing up for a relationship with this company.

it's not easy to untangle it once you decide to sign up for a credit card, right? Yeah. With the Buy Now, Pay Later loan, you make the one purchase, you sign up for that one thing, you make your four payments, and then you're done. I can see how that appeals. Yeah. And you know, the data shows that a lot of the youths agree with you.

The ZFPB actually just came out with some data in January that said for borrowers between the ages of 18 to 24, buy now pay later purchases made up 28% of total unsecured consumer debt. You want to compare that with an average of 17% among borrowers of all age groups. So younger people are leaning a lot more on this financial tool.

According to Austin Kilgore, he's a consumer insights analyst for Achieve Financial. That's a digital finance company. He says this likely starts because it's hard to get your hands on a credit card before you're 21. And then once they hit age 21 and they're actually able to get a credit card, they may continue to use buy now, pay later because that's what they're comfortable with. That's what they're used to. And then Mariel, he says there are two other main categories of buy now, pay later users.

There are people with little to no credit history. That means you don't have enough credit information for the three main credit agencies to generate an actual credit score. And then there are people using BNPL loans as a credit product of last resort.

Because they can be a double-edged sword, especially for new credit users. This is Ed DeHaan, a professor at Stanford's Graduate School of Business. It's good in that a bunch of people are getting access to credit that didn't have it before. The bad thing is that those characteristics are the same characteristics of people who tend to get into trouble with debt. Because they don't have that experience yet, they tend to overspend and then have trouble paying off their balances, which can lead you into a debt spiral.

Let's talk a little bit about how Buy Now, Pay Later works. I know when you get a credit card, you have to apply. They ask for your income. They'll look at your credit history or your credit score. How do Buy Now, Pay Later companies screen the people they're lending money to?

Yeah, Marielle. So that's one of the reasons why buy now, pay later loans are really blowing up. The barrier to entry is so much lower. It's not that anyone at all can get a buy now, pay later loan, but a lot, lot more people can. You know, you have to be over 18. You know, you have to have a bank account and a debit card, a mobile number. But what you don't need a lot of the time is a credit score and credit history.

And that's really unusual. It's really against the norm. Got it. What they use instead is these underwriting algorithms. And they're proprietary, so we don't know exactly what's in them. Sometimes they'll pull a soft credit check, but not all the time. Here's a Dahan.

So what they say, and that's probably accurate, is that they can profile people using alternative data, things like your shopping profile, your browsing habits, whatever else you can buy out there in the marketplace for data, and avoid needing to use the credit score and profile you for your risk.

Now, what that means is that people who don't have a credit score, who have got a low credit score, are able to get BNPL when they otherwise couldn't get a credit line. And this happens super fast, like in real time. Like from the moment you submit the application, you can get approved within seconds. Yeah.

You know, the question I think a lot of folks have about newer products or ways of doing things is what's the catch, right? How do these companies make money? Okay. So, Mariel, I think there's a big misconception out there that these companies want consumers to miss payments to collect a bunch of fees. Ed from Stanford was like, no, actually, they really want you to spend money and they want you to pay off your loans on time. So there are two main ways that buy now, pay later providers make money.

The main way, the first way, is commission from retailers. So you buy something online from your favorite makeup company, say, and you decide to break up the payments. The Buy Now, Pay Later provider pays the retailer on your behalf, and then they take a cut for their trouble. And that cut is generally higher than the typical credit card company because data shows that people are spending more with Buy Now, Pay Later.

Okay, so basically retailers are partnering with buy now, pay later companies and giving them a bigger commission because...

We are spending more money at their stores when we use Buy Now, Pay Later. Yeah, exactly. The other major way that they make money is that Buy Now, Pay Later providers have their own in-app shopping. And it's a super tailored shopping experience because they like really know your history. Here's the analogy I'd used.

When you walk up to the grocery store checkout aisle, there's impulse buys there for us. You know, there's candy bars, there's gum, there's magazines. And they have to put things there that appeal to a wide variety of people.

But with BNPL, they put the exact products in front of you that you really want. And they do it at a time when you've got your wallet in your hand, like you're ready to spend, which makes that impulse purchasing very powerful. So that's how BNPL makes money. They just give you your own personal mall. It'd be just Mall of Marielle. I like that.

I like the idea, but I don't like some company knowing that much about me, which I know they already do. And I think it would just incentivize me to consume more and I'm trying to consume less. Right. It's a smart idea. Yeah. And that's what makes it so dangerous. Absolutely. Okay. Let's say I do choose Buy Now, Pay Later as my payment option when I'm checking out. What does that actually look like? Yeah. Let's walk through the steps for anyone who hasn't done this. So it's really easy to do. Okay.

You go to checkout and you would choose the Buy Now Pay Later provider like Klarna or Afterpay as your method of payment. Some companies have a digital card you can use so you can tap to pay at physical locations even, not just online. If it's your first time using the service, you'll need to go through their application process first and get approved.

You'll put a card or bank account on file with them. Then you just select that BNPL option at checkout, and they'll front the whole cost of that purchase for you with the retailer. From there, you'll choose a payment plan on that BNPL website or app. An option you'll see a lot is for interest-free payments over six weeks, but every company is different, and there are a lot of different ways to slice it. Then you'll make your remaining payments, and assuming you've made them all on time, the relationship with the provider is over. You're

You're done. Does the money get withdrawn automatically from your account or do you have to do it manually? You can sign up for auto payment and sometimes it is required. Okay. If you're someone who is a frequent credit card user, if you're someone who is maybe curious about buy now pay later, there's some obvious differences here.

Buy Now, Pay Later loans are not designed to carry a balance. Generally, they charge late fees for missed payments, but not any interest. So with your credit card, you accumulate your purchases with that one credit card throughout the month, and then you pay them all off or you pay off a certain percentage at the end of the month. With a Buy Now, Pay Later provider, if you make 20 purchases, say all through one thing like a firm, each purchase is its own separate loan and it's on its own separate cycle. Right.

So what happens if you do miss a payment? You know, Marielle, one missed payment, not a huge deal. There may or may not be a late fee depending on the provider. But missed payments can snowball quickly. They can be very dangerous. And I'm going to walk you through why. Okay. It says big danger to consumers is how these companies gamify repayment of these loans. So

In a lot of cases, you're required to be connected to a checking account or debit card for that initial loan. Like I said, sometimes it's on auto pay. And if you don't pay, they'll cut you off from your credit limit. Okay. No more purchases. But what also happens is if you make that first payment on time, they'll say, hey, good job. Thanks for paying. We'll

We'll give you another $200 to spend at our store if you keep paying us. How does that sound? And psychologically, that's very appealing. Exactly. Because you're like, ooh, they're giving me $200. They're not giving you anything. Exactly. It's still your money. Exactly. Here's Ed. If you make your payments on time, your credit limit goes up. And that's a bit of an adrenaline or a dopamine hit to people. So then people might end up spending more than they can afford. Exactly.

And on top of that, they might miss other payments. So they might miss their credit card payment. They might miss a cell phone bill, maybe an auto payment. You can get out over your skis. Yes. Very easily. Here's that again. Unfortunately, we all have times when we need saving from ourselves.

And when we're falling into a debt hole, that is one of those times that it's better just to be cut off early, start making changes in your life, figuring out how to pay off those balances than to get too deep in debt with many, many outstanding lines. It just becomes so much harder to correct it.

So there are some definite risks to using Buy Now Pay Later like there are with any sort of loan that you take on. Absolutely. I think one of the main points here is, you know, like any other financial tool, it can be very useful. It can be very powerful if you can use it responsibly. But there are some things to look out for.

For example, a big thing that Jennifer Streaks, senior personal finance reporter from Business Insider, told me was just how easy it is to treat these loans kind of like monopoly money. I really think that people don't see it as real debt.

Because it's something that's not attached to a credit card, it doesn't operate the same way as a credit card. It's just something that they sign up for really quickly because there's a low barrier to entry. It's almost as though it doesn't seem real. It's just, you know, it's just a little bit of cash. So they don't see it as seriously as they would a credit card. She goes on to talk about how a lot of that has to do with the really small numbers up front, right? You're tricking your brain a little bit. I was going to pay $100 today.

But if I only have to pay 10, then I've got $90 today to do something else. And it almost feels like you got some money back. But you've got to think to yourself that over time when you start to get used to this and everything can't be a buy now, pay later. It just can't.

And so sometimes it's just better to just go ahead and pay for it and not get caught up in racking up these loans. You're like, I'm going to pay that later, and I'm going to pay that later, and I'm going to pay that later, like kicking the can down the road. Yeah. Okay, so...

If you do decide to use Buy Now, Pay Later, how can you be smart about it? First of all, you need to look at the fine print. Terms and conditions vary widely between different Buy Now, Pay Later providers. Just because you're familiar with one doesn't mean you understand the game for all of them. There's a few things that you want to pay attention to, right? The payment schedule, repayment methods, purchase limits, etc.

interest and late fees. These are all really different from one to the next. Yeah. And you can find the fine print probably on their websites, right? Yeah. And before you sign up, you can read through those agreements. Yeah. Another common challenge with buy now pay later is managing multiple transactions across multiple lenders and multiple merchants versus just using one credit card where you can go to the credit card company and pay one bill at the end of the month.

So one thing that can help you with that is, you know, a simple money management app to track your spending and your purchases and to add in alerts when you need to pay. Another suggestion, which I thought was helpful, if you like Buy Now, Pay Later, if it is a system that's working for you, maybe consider just sticking with one lender. Here's Austin. If you have five transactions from one Buy Now, Pay Later lender, you go and log on to their website. You're going to see all five transactions on that lender's website. It's not five different logins.

And so your relationship is in that case a little more similar to your credit card company.

Yeah. You might also try to be strategic about the timing of your purchases. So, you know, you pay off your credit card at the beginning or the end of each month. You might also want to think about spacing out your buy now, pay later purchases. Right. As soon as you check out 14 days later, that next payment is going to be due. So you need to make sure that it aligns with if it needs to with your when you get paid.

or when you're going to be able to afford to make those payments. Once those payments are set, it's really hard to change the payment dates. Yeah. And then one final thing to think about here, returns may be more difficult if you're buying through buy now, pay later loans. It is an entire process because the buy now, pay lender is a outside party. So it's not like you're just returning it and everything is housed within one space.

The merchant then has to confirm that the item was returned. Okay. So any final words of wisdom here based on your reporting? Yeah, Mariel, a couple of things. So, you know, like it or not, the credit score and credit history are an important part of our economy. If you're exclusively using buy now, pay later loans, you're going to have to pay later.

it's important to remember you're not building a credit history with those purchases. At least not yet. In 2024, Apple did start reporting their BNPL user data to credit bureaus, and there has been a push for BNPL companies to start reporting. But until that becomes a standard, we still need credit scores and credit histories for a lot of things in life.

If you eventually, you know, want to buy a car or sign a lease, buy a house, get a loan from a bank, it's something you want to think about. And if you're going to continue to use buy now, pay later, that's absolutely okay. It can be really great. But just be careful. Be smart. You know, when it's broken into small, small numbers on a teeny tiny screen in your hand, it's so easy for it to not feel real. But that debt can be very real. It is your money. It's real money. And just because it's not on a credit card and just because they don't charge interest

doesn't mean that it won't eventually get expensive. It's real money. Thank you, Andy, for this breakdown. Thanks, Mariel. All right, it's time for a recap.

More and more people, especially young people, are using Buy Now, Pay Later loans to pay for all sorts of purchases. They're easy to sign up for, and they allow you to break down large costs into smaller installments over weeks or months. If you're going to use Buy Now, Pay Later loans, make sure you can pay the total amount of your purchase, not just the smaller amounts, because missed payments can snowball quickly.

Also, if you're a fan of buy now, pay later, consider sticking with one provider rather than spreading your charges out across many different ones. Experts we spoke to said it can be easier to keep track of payments that way. And make sure to read the fine prints. Different lenders have different terms, right? Payment schedules, when the money is withdrawn from your account, if you'll incur late fees and when will all depend on your buy now, pay later provider.

For more Life Kit, check out our other episodes. We have one on credit card points and one on how to eat healthy on a budget. You can find those at npr.org slash life kit. And if you love Life Kit and want even more, subscribe to our newsletter at npr.org slash life kit newsletter. Also, we love hearing from you. So if you have episode ideas or feedback you want to share, email us at lifekit at npr.org.

This episode of Life Kit was reported by Andy Tegel and produced by Claire Marie Schneider. Our visuals editor is Beck Harlan and our digital editor is Malika Gharib. Megan Cain is our supervising editor and Beth Donovan is our executive producer. Our production team also includes Margaret Serino and Sylvie Douglas. Engineering support comes from Arthur Laurent. I'm Mariel Cigarra. Thanks for listening.

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