Buy Now, Pay Later (BNPL): A Smart Financial Strategy?

When you want to buy something, but don't have the money, you often end up picking between two less than desirable choices. You can delay the purchase until you save up for it, or you can put it on your credit card and pay a high rate of interest until you can pay off the balance.

Retailers want you to buy today, but also know that if you're paying interest charges on yesterday's purchases, that may delay you from buying again. That's why retailers are increasingly teaming up with pay-over-time fintech services to provide shoppers with the option to "buy now, pay later" without owing any interest.

In this article, we'll explain what a pay-over-time loan is, how it works, what the most popular services are, and the pros and cons of using these payment services.

In this article

• What is pay over time?
• How pay over time works
• Who offers pay over time
• The pros and cons of using pay-over-time services
• Should you use pay over time instead of a credit card?
• FAQs
• Bottom line

What is pay over time?

Pay over time is a financial tool that allows customers to borrow the money to buy goods and services today, but pay for them in several interest-free installments over a predetermined period of time.

The concept itself has been around for decades. Many retailers have long offered layaway or "Christmas club" options that split purchases into multiple payments to make expensive items more affordable. However, in most cases, you didn't receive the item until after you paid for it in full.

But companies like Affirm, Sezzle, and Afterpay flipped the layaway concept on its head when they started offering their pay-over-time services in the last decade. Instead of making you wait until you pay off your purchase, these services allow customers to take their item home today, then pay it off over time.

In addition, pay-over-time services make it easier for millennials and Gen Zers to make larger purchases. The statistics show these age groups are less likely to carry credit cards than older generations. If retailers want these younger consumers to make big-ticket purchases, they may be increasingly likely to offer a pay-over-time feature.

How pay over time works

When customers use pay-over-time financing, the majority of the shopping process is the same. Customers shop like normal, then they'll be presented the option to pay over time during checkout. Some retailers also mention the payment option at their brick-and-mortar store or on their website.

If the shopper doesn't already have an account with the specific pay-over-time provider the retailer works with, they'll need to apply and get approved before they can complete their purchase.

When creating their account, they'll typically provide their name, phone number, email address, date of birth, and Social Security number. Because the customer will not be required to provide their full Social Security number or approve a credit inquiry, the application will not affect their credit score.

The payment provider processes the application within seconds and displays their decision right on the screen. Once approved, the screen displays the shopper’s pay-over-time limit, letting them know how much they can spend at participating retailers.

The customer returns to the checkout process to complete their purchase and chooses the pay-over-time option. Before completing the transaction, the website will display the full purchase price, with the amount owed on each repayment date clearly indicated so the customer will fully understand the repayment details for financing the purchase in advance.

When the transaction is complete, the retailer is paid immediately by the financing company. The retailer pays a percentage of the purchase price to the pay-over-time provider, just like they pay a transaction fee when a customer swipes their credit card. The financing provider collects the customer’s payments, not the retailer.

The fees that a retailer pays for this option can be higher than a credit card transaction. However, retailers are willing to pay these higher fees to increase conversion rates at checkout and sell more inventory at full price.

After the purchase, the customer then makes the agreed-upon payments to pay back the financing company. In most cases, the payments are automatically deducted from their bank account. Additional payments can typically be made at any time to accelerate the payoff or to increase available credit for future purchases.

Who offers pay over time

Customers have numerous choices when it comes to paying for their purchases over time. If you're wondering how to get a loan for your planned upcoming spending, here are a few of the options that you may come across while shopping:

• Affirm: This is a financing company that partners with many online retailers. Affirm has become very popular through its partnership with Peloton to finance bikes for its customers.
• Afterpay: Afterpay allows shoppers to buy now, pay later in four installments with zero interest and no fees when you pay on time. Participating retailers include Rue La La, Athleta, and Houzz.
• American Express: Amex offers cardholders a pay-over-time feature, branded quite simply as Pay Over Time. This feature can be used on qualifying purchases of $100 or more when using certain charge cards. Eligible American Express cards include the Business Centurion Card, Business Platinum Card, Business Gold Card, Business Gold Rewards Card, Classic Business Gold Card, Business Green Rewards Card, and Business Green Card, as well as Executive Business, Small Business, and Business Purchase Account Cards.
• Klarna: Klarna allows customers to buy now, pay later through its app, with integrated brands, or anywhere Visa is accepted. Customers can pay for purchases over time in four interest-free payments.
• PayPal Credit: PayPal Credit (formerly Bill Me Later) customers get six months of no interest on purchases of $99 or more anywhere PayPal is accepted.
• Zip: Zip was previously known as Quadpay, and it allows you to split any purchase into four payments. If you use the app, you can access Zip anywhere you shop online or in-person. It can also be added to your Apply Wallet or Google Pay account. Visit Zip to learn more.