Are Buy Now Pay Later (BNPL) Options Online Legitimate?

Online shopping is a part of our daily lives. In most cases, that’s a good thing! It’s far easier to compare prices and find out what other customers think of them when you can do it from your phone or computer and at any time you choose. We’re fans of online shopping!

What we don’t like for ourselves or for our valued Additional Financial members is the prevalence of misleading online offers. One example is the buy now pay later deal, which is something we see everywhere online. Are these deals ever legitimate? 

We put together this guide with help from some financial experts to help you understand what buy now pay later options are, how they work and whether the risks outweigh the rewards. Here’s what you need to know.

What is Buy Now Pay Later?

Buy now pay later options are the modern day equivalent of what used to be called layaway. During the Great Depression, stores began offering customers the option of making a down payment on items they wanted to buy and then paying the balance in installment payments. They didn’t charge interest but there was usually a financing fee. Stores might also charge a cancellation fee or a restocking fee if people missed a payment or decided they didn’t want the items in question.

Buy now pay later is an option that allows shoppers to pay for items with a series of regular installments. Unlike layaway, the companies that offer BNPL may charge interest and fees. Research shows that Millennials and Gen Z consumers are less likely to trust credit card companies and more likely to opt for a BNPL plan instead.

What Are Some Companies That Offer Buy Now Pay Later Financing?

Technology has replaced old-school layaway plans with buy now pay later apps. When you install one of these apps on your phone, you can use them to spread out purchases with flexible payments. 

Some of the most popular and widely-used BNPL apps include the following:

  • Affirm
  • Afterpay
  • Four
  • Klarna
  • PayPal Pay in 4
  • PerPay
  • Sezzle
  • Splitit
  • Zip (previously known as Quadpay)

The fee structures of these apps vary. In a review of apps, Investopedia determined that Affirm was the best app because it charges no late fees and allows users to choose a payment schedule that works for them. It also requires a soft credit check which we think is essential to prevent people from spending more than they can afford.

We should note that many retailers have partnered with these companies. Examples include Best Buy, Pottery Barn and Target. Some retailers offer in-store BNPL options, as well.

What Are the Benefits of Buy Now Pay Later?

What is it about buy now pay later that appeals to people? There are some benefits that appeal to younger consumers in particular. These include the following:

  • Buy now pay later can make budgeting easy because it allows you to spread out payments for your purchases over time. 
  • It can be helpful at times when you need to make a lot of purchases, such as moving to a new apartment or a house, to have the option of not paying for everything at once.
  • There’s no delay in getting the items you buy. You can get them and enjoy them while you pay off the balance owed.
  • In some cases, you won’t need to pay interest or late fees.
  • Sign up is quicker than it is for credit cards and there is often no credit check required, meaning that you can get financing even if you have bad credit or a limited credit history.

These benefits are the reason that so many people are taking advantage of buy now pay later options online.

What Are the Risks of Buy Now Pay Later?

It might not surprise you to hear that some of the benefits we listed can turn into risks in some circumstances. Our financial experts are not fond of buy now pay later because these options can so easily turn into traps for consumers who don’t understand the risks.

Let’s start with David Reischer, Esq. He’s a consumer attorney and the CEO of Here’s what he told us about buy now pay later options:

“Buy Now Pay Later options can take advantage of people that do not have sufficient income or assets to meet their obligation on an installment basis. Many low income persons do not have the financial sophistication to realize that when they buy now that they may be paying junk fees or late fees by participating in such a program.”

One of the biggest risks associated with BNPL is that if you don’t read the terms carefully, you may not realize that you’re signing up for late fees and penalties if you don’t pay on time. This was a concern echoed buy Ann Martin, the Director of Operations for CreditDonkey. She told us:

“When you don’t make your payments on time, you can deal with serious consequences, forcing you to pay additional fees and weaken your credit score.”

You can be sure that any BNPL app you use will report late payments to the three major credit bureaus. Most will add late fees to the balance you owe. That means there are several ways BNPL options can hurt your credit:

  • If you pay late, the late payments will be reported to the credit bureaus. Timely payments are the most important factor in determining your FICO score.
  • Late fees get added to your debt and may put you in financial distress, which can lead to additional credit card use or late payments.
  • BNPL apps may eventually run “hard” credit checks on you, which can knock a few points off your credit score.

These risks are amplified by the fact that most BNPL companies do not run any credit check before financing a purchase. That can seem like a benefit, but the truth is that for many, it’s a risk. The purpose of checking a consumer’s credit score before granting a loan of any kind is to ensure that the borrower can repay the loan. The wide availability of BNPL options can lead to reckless spending, where consumers buy items they can’t afford.

How Do Buy Now Pay Later Companies Make Money?

One of the ways that BNPL companies attract new users is by advertising that they don’t charge interest fees. That’s an undeniably appealing claim. If you buy something with a credit card, you will pay finance charges unless you pay the entire balance immediately. We all like to save money and the option of what amounts to an interest-free loan is enough to get many people on board with the option of buying now and paying later.

Carter Seuthe is the CEO of Credit Summit. He pointed out that BNPL companies aren’t in business out of the goodness of their hearts.

“Many companies that push [buy now pay later] do so with the knowledge that you won't be able to pay it off and they can… charge you lots of fees and repossess the item.”

Let’s break that down. If a company doesn’t charge an interest fee for BNPL, how are they paying the bills? They must be making money somehow – if they weren’t, they wouldn’t be in business. That’s a matter of simple economics.

The short answer is that they are making money. Most BNPL services charge late fees. If you miss a payment, they’ll add a late fee to what you owe. If you pay the late fee, they pocket it and it helps to fund their business. If you continue to miss payments and don’t pay the late fee, they’ll repossess the item you purchased.

The worst part of this is that this happens by design. These companies know that some percentage of users will pay late fees, and some percentage will fail to pay and lose the items they purchased.

Is BNPL Ever a Good Idea?

Now let’s tackle the big question: is it ever a good idea to choose the buy now pay later option? The answer is a qualified maybe. 

If you’re someone who has a good handle on your finances and can stick to a budget, then BNPL can be a good way to spread out the payments for purchases without paying financing fees. Plenty of people use BNPL and do so without paying fees or doing themselves any harm.

However, if you’re someone who struggles with money, tends to be impulsive or doesn’t have a budget, then we strongly recommend against buy now pay later. It’s easy to spend more than you can afford and get hit with late fees. You may even lose the items you purchased. A better bet is to find an affordable credit card and use it responsibly to build your credit.

The prevalence of BNPL options is something that requires attention. While it can work for some people, there are significant risks associated with financing your purchases through these companies, particularly if you’re prone to overspending.

Are you looking for an affordable way to pay for the things you need? Addition Financial has credit cards with affordable rates. Click here to read about our credit card options and apply today.

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.