Loans

What Are Affirm, Afterpay, Klarna and PayPal Pay in 4? How 'Buy Now, Pay Later' Plans Work

BNPL installment loans can help you stretch out payments for things you need now -- but there are risks.

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How many times have you added items to your online shopping cart only to balk at the total? While staying within your budget is wise, if you need to make a purchase that you're considering charging or borrowing money for, a "buy now, pay later" service might be a smarter option.

BNPL companies like Affirm, AfterPay, Klarna and PayPal Pay in 4 work by offering you micro installment loans. This loan covers the cost of your purchase right away, and lets you repay the balance over time. These services have gained traction since the pandemic and today AfterPay has more than 16 million active users, followed by Affirm's 8.7 million, most of whom are millennials and Gen Z shoppers.

But what exactly are these installment plans and how are they different from credit cards and personal loans? Here's the breakdown of these alternative financing options and how to use them.

What are installment services?

If you've ever bought a car, a home or an education, you've probably used an installment loan. Installment loans are lump-sum loans that you pay off over a set amount of months or years. For products like cars and homes, they're often funded by well-known banks, like Chase or Wells Fargo. 

Mini installment plans from companies like AfterPay and Affirm act like microloans for everyday purchases, like clothes, makeup, electronics and gym equipment (like Peloton). Affirm, for example, also supports unexpected purchases, like car repairs through YourMechanic. But unlike new car or home purchase loans, which you typically pay off over the course of many years, products and services financed through these services are typically paid off in a few weeks or months. 

How do they work?

Each online installment plan offers different setups, but the gist is: You buy your item now, select the plan at checkout with a qualifying retailer, create an account and complete your purchase. With Klarna and AfterPay, you get your goods right away and then pay for them over four installment payments: one when you check out and typically every other week or once a month thereafter. Affirm has payment options that usually range from three to 12 months, although some plans have terms as high as 48 months.

For AfterPay, as long as you make your four payments, you won't get charged late fees. Klarna has different payment options and some of them charge interest. Affirm charges 0 to 30% interest depending on your payment plan.

To take advantage of an interest-free installment plan, you need to shop with retailers that support it. Anthropologie, DSW and Fenty Beauty are AfterPay partners, for example. You might see the installment service's logo when you're viewing a product, letting you know the partnership exists and you can select a payment plan at checkout. From there, you'll usually pay the first installment and the next one will come out about two weeks later. Otherwise, the product or service will arrive on time, just like it would if you paid in full at checkout.

You can also shop through each company's app. Affirm, AfterPay, PayPal and Klarna all have apps in the App Store and Google Play that let you shop, monitor your orders and make payments. 

While they aren't like traditional loans, they're different from other types of alternative payment methods. For instance:

  • They aren't credit cards. A credit card is a revolving credit line that you get approved for. You use your card to pay for your purchase in full and then at the end of the billing period you'll pay off your bill or make payments until you pay it off in full. Typically, if you don't pay your balance off at the end of the billing period, interest will accrue, which can be 20% or more. CNET always recommends paying off your credit in full
  • They aren't the same as layaway. Layaway is when you agree to pay off an item over the course of a few months and once you've paid it off, you can take it home. Layaway usually requires an upfront deposit and a service fee, and you don't get your goods until you've paid for them in full. Some installment plan companies require an upfront deposit, but you don't have to wait to get your item; you get it right away.

How does an installment service affect my credit score?

When you apply for a loan or a credit card, that hard credit check looks at your credit history to see if you're responsible enough with credit to lend to. With BNPL apps, there's no hard credit inquiry. If the app checks your credit, it'll be a soft credit check, which won't hurt your credit score. The services don't specify the credit score you need to shop with them.

If you aren't diligent with payments, your credit score might be affected. For most micro installment loans, you're required to make payments about every two weeks and in four total installments. So if you don't pay your bill on time, that triggers a late payment for some companies. The three major credit bureaus will get notified and you could see your credit score take a dip. Late payments are one of the biggest factors in determining your credit score, and a drop in that could hurt your chances of borrowing money in the future.

Penalties and fees vary by company. Affirm and PayPal do not charge late fees. AfterPay does, though these fees will not exceed 25% of the purchase amount. Klarna doesn't charge a late fee but if you don't make a payment when it's due, you can be blocked from using the site and app in the future. None of these services charge prepayment fees, so you won't get penalized for repaying your balance sooner.

Should I use BNPL services?

It depends on what kind of shopper you are and your mentality about money. Here are some pros and cons to consider:

Pros

  • You can buy items and services, even if you can't afford them right away: If you have things you need or want to buy, you're not obligated to pay full price at checkout. Micro installment loans let you pay out your purchase over a few weeks.
  • You don't need great credit to get approved: Most services do a soft credit check, which won't hurt your credit score . If you don't have great credit or a long credit history, this is a good alternative payment option.
  • It's simpler than a loan or credit card: If you've had trouble with credit cards or don't like using them, this is an easier method than applying for a credit card or personal loan. You can apply at checkout, whereas if you want a credit card or loan, you'll need to wait a few days before you can use those funds.

Cons

  • You might believe you're spending less: If you cringe at a $1,000 couch, seeing payments broken up into $250 every other week, for example, tricks you into believing you're paying less for an item. In reality, you're still paying the same amount and you're borrowing money to do it.
  • You may be charged interest or other fees: Depending on the service you choose and the repayment plan you select, you could be charged interest. Affirm, for instance, offers interest rates between 0% and 30%. While this interest does not compound like a credit card, spreading payments for that $1,000 couch over 12 months at a 30% interest rate could end up costing you $169.76 in interest alone. 
  • You might not get approved for the full amount: Your credit score may not preclude you from getting approved for a BNPL loan, but it's still a factor when determining your loan amount and interest rate (if applicable). That means, there's a chance you might not get approved for the full amount you're requesting. 
  • It's still a loan: Remember you're still taking out a loan, even if you pay it off sooner than you would a traditional loan. Not paying on time could result in interest fees, late payment fees or not being able to use the service in the future.

While the convenience of delayed payment sounds appealing as a way to get something now, you're still on the hook for paying your bill in full. If you need something now but can't afford it, micro installment loans might be a good idea. But if you don't think you'll be able to afford payments, you may want to consider another payment method or waiting until you have cash on hand to make your purchase.

Correction, April 30: Affirm has 8.7 million users, more than we previously quoted. It also has repayment options ranging from three to 12 months, a shorter period than previously listed. Clarified that AfterPay does not charge late fees as long as you make four payments.