With $15.9 billion in financing occurring between October and December of 2023 — a 17.5% increase from the year before — a popular financing option offered to consumers by retailers is Buy Now, Pay Later (BNLP). Unlike traditional credit cards that can be used at any retailer of the user's choice, BNPL is typically an installment loan arrangement with one retailer for a single purchase.
How does BNLP financing work for customers?
If you are buying a couch from a furniture store, the store may offer to let you "buy now, pay later." You can take the couch home right away as part of the agreement. The cost of the couch is then divided into equal payments (installments), with the first payment being due immediately or just a few weeks after the purchase is made.
Each time you apply for a BNPL offer, it's an application for a new line of credit.
The store itself may handle the financing, but it's common for them to use a third-party company like Afterpay, Klarna, or Affirm. These BNPL companies make their money both through fees charged to retailers and customers. These fees can inflate the cost of items, making them more expensive than if you bought them outright with cash.
However, if you repay the loan on time, you could pay little to no financing fees or interest. If you don't, you could be on the hook for interest much higher than using a credit card or traditional loan.
Who can use a "buy now, pay later" service?
While it's open for anyone 18 and up to apply for, only those who meet the company's requirements will be approved. You'll also need a mobile phone number and a way to make your payments (credit card, debit card, or bank account).
What credit score do you need?
Because there's no hard credit check, your credit score won't go down when you apply. You also don't need a minimum score to get financing. However, a BNPL company will report late payments to credit agencies, so you'll want to take the payments seriously and be sure you make them on time.
Affirm, Klarna, and Afterpay: Pros and cons
The top BNPL providers each have their own advantages to consider. Use this information to compare them and find the best solution for you.
Affirm
Affirm is one of the largest BNLP providers in the U.S. and was co-founded by one of the co-founders of PayPal in 2012. It serves hundreds of thousands of merchants, including Walmart and Peloton. Affirm's distinction is using machine learning to determine the best financing option for each purchaser and purchase. It's now a publicly traded company that focuses on being transparent with its pricing model for consumers.
Pros
A no-interest option and flexible payment terms help customers pick the right payment plan structure for their budget and goals. The Pay in 4 Loan, for example, uses four bi-weekly payments over two months. Customers aren't charged late fees, but purchases may be subject to interest rates of 0-36%.
Affirm's virtual credit card option is a pre-approved line of credit that can be used at retailers participating in Affirm's financing programs. Consumers can get access without a credit check and use the app on their phones to pay for online purchases. A partnership with Walmart lets customers pay at self-checkout stations with Affirm financing.
Cons
With interest rates as high as 36%, the financing may cost more than traditional credit cards or loans. Not all purchases will be approved at checkout and are subject to the terms of that retailer. Some retailers require a large down payment even with Affirm financing, leaving customers to come up with cash at the time of purchase.
Klarna
Klarna is a BNPL company founded in Sweden in 2005. It offers services to over 500,000 merchants around the world. It has partnered with companies in almost every industry, including Versace, Etsy, and Instacart.
Pros
Klarna's browser extension and app notify consumers with pricing alerts on the items they want to buy so they can purchase when items are cheaper. The most popular payment option is the Pay in 4 plan, which breaks up your online purchase into four installments. Klarna offers some purchase protections for select product categories, including refunds within 21 days for items not received. The app lets you track and manage all your Klarna-financed purchases in one convenient dashboard.
Cons
When you opt for a Klarna payment plan, the company runs a soft credit check. This doesn't affect your score, but it will disqualify some consumers from financing. If you have too much credit out with Klarna or the item you want to buy is too expensive, they could reject your application. Klarna charges a late fee after just 10 days, and continued failure to pay will result in a negative item on your credit report.
Afterpay
Afterpay is a global buy now, pay later company established in 2015. It offers services in the U.S., Canada, Australia, and New Zealand, as well as in the U.K., France, and Spain as the service Clearpay. With 16 million active users, it supports merchants such as Crocs and Vera Bradley.
Pros
The seamless integration into popular online and in-store retailers makes it easy for customers to get products right away. Installments get paid in six weeks through four equal amounts. Consumers who pay off the entire balance in full, according to the installment plan terms, pay no interest. Afterpay's collaboration with high-end brands and top e-commerce platforms (Shopify, WooCommerce, etc.) gives customers a flexible way to buy in-demand goods at a time that's right for them.
Cons
Afterpay may request up to 25% of the product price to be paid at the time of purchase, though this is more common with new users. For those with a good history of payment, Afterpay can often defer the payment for up to two weeks.
How they compare
When it comes to choosing a payment plan, you have many options. So, is Affirm, Klarna, or Afterpay better for you? Our quick comparison shares the highlights:
| Affirm | Klarna | Afterpay | |
| Interest | 0-36% | 0-33.94% | 0-35.99% |
| Fees | $0 | Late fees of up to $7 | Late fees up to 25% of order value |
| Notable retailers | Amazon, Walmart, Target, Priceline | Shein, IKEA, Adidas, Nike, Sephora | Alo, Ulta, Levi's, Skechers |
Also, each company takes a different approach to flexibility. While all offer a four-payment plan of some kind, all of these BNPL services lets you set up a monthly plan with interest for larger purchases where you may want to take longer to pay the balance down.
Conclusion
It's common for consumers not to think about the BNPL services available until they have items in their online cart. Researching these companies ahead of time can help you make more informed decisions when it comes time to hit the "checkout" button.
