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What Is Buy Now Pay Later (BNPL)?

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedSep 20223 min read

You may have seen or heard the phrase in advertisements, particularly online: buy now, pay later, no money down. But what does “Buy Now Pay Later” mean exactly, and what can you purchase with it? We’ll give an overview of how this form of financing works, along with its pros and cons, below.

What is Buy Now Pay Later financing?

Buy Now Pay Later, or BNPL for short, is a financing arrangement that allows consumers to make a purchase and pay for it later. These payments typically spread the cost over multiple small installments – BNPL arrangements are often called point of sale installment loans for this reason.

Consumers can pick and choose from a variety of Buy Now Pay Later options, including Klarna, Affirm, and PayPal. Like other loans, some BNPL plans include interest payments and late fees, although many plans don’t have any added charge.

How does Buy Now Pay Later work?

While the general principle is the same across all BNPL plans, there is some variation when it comes down to the terms and conditions. How does Buy Now Pay Later work when you pay in instalments?

You make a purchase and choose the BNPL option at checkout
You provide some basic details for a soft credit check
You make an initial instalment or down payment at checkout
You pay the remaining cost over time in a series of instalments

BNPL plans typically accept multiple payment options, including card payments and online bank transfers.

One variation is when you see the phrase “buy now, pay later, no money down.” This means that you don’t need to pay anything to check out and receive your product. Instead, you’ll pay the full cost later.

Most short-term plans are broken up into four equal instalments without any added surcharge or interest fees. This sets BNPL apart from credit card payments, which come with accrued interest. However, credit card payments are more flexible in that you only need to pay the minimum balance each month. BNPL payments are fixed and regular.

BNPL and bank debit

BNPL provider Klarna chose GoCardless to offer our bank payment service to their 21 million US customers! GoCardless is a global leader in bank payments such as ACH Debit that offer businesses more reliable, secure and affordable payment collection. Read more about the business benefits of adding bank payment methods like ACH Debit to your payment mix.

Pros and cons of Buy Now Pay Later for consumers

There are advantages and disadvantages to Buy Now Pay Later arrangements.

Benefits include:

Quick approval process
Low or zero interest rates
Easy approval even for low credit scores
A soft credit check doesn’t impact your score

On the other hand, there are a few potential downsides as well:

No cash-back bonuses, rewards points, or other perks
Refunds can be delayed due to extra processing times
Difficult to track your payments
Missed or late payments will impact your credit score

To minimize any downsides, look for plans with no interest rates that you know you’ll be able to pay off on time.

However, it's important to remember that BNPL encourages you to spend money. In a survey carried out by The Strawhecker Group (TSG), BNPL customers noted that they tend to spend more through BNPL than other payment methods.

Which websites use BNPL?

Most major retailers now partner with a BNPL provider to offer their customers this option.

One of the largest sites in the US is Afterpay, which partners with big names like Gap and Old Navy. Its payments have zero interest rates attached.
Affirm partners with brands like Walmart, but one thing to note is interest rates are set by the individual retailer. This means that while some Affirm loans come with zero interest, others will have a 30% APR.
Klarna is a third option, partnered with stores including Macy’s and Sephora. It typically breaks payments into four equal instalments with no interest fees.

With additional sites like Quadpay and PayPal also available, you might even see more than one BNPL option to choose from at checkout.

Does Buy Now Pay Later offer a good deal?

It depends. Some BNPL options offer an easy way to finance a larger purchase without interest fees, which seems like a good deal on paper.

Just be sure that you understand the terms and conditions clearly. While some companies will ask you to make four equal instalments, others will spread them out into longer repayment periods. Any late or missing payments could cause a hit to your credit score.

It’s always a good idea to compare BNPL to other financing options, including personal loans and rewards credit cards, to ensure you’re getting the most for your money.

We can help

GoCardless helps you affordably automate payment collection, ensuring payments are always paid on time. Offering instalment packages to your customers has been shown to increase sales, and it's easy to do this with ACH Debit via GoCardless.

GoCardless can also help you collect invoice payments on time and automate recurring payments.