How Do Buy Now, Pay Later (BNPL) Apps Work?

If you’ve shopped online recently, odds are you’ve come face to face with buy now, pay later (BNPL) apps. These are becoming increasingly common, and they can be a compelling selling tactic to make customers more likely to complete a purchase. However, how do buy now, pay later (BNPL) apps work?

Like all things in life, if something sounds too good to be true, it probably is. That being said, most of these BNPL apps are legitimate, and they can be a smart option if you proceed wisely. In this guide, we’ll explain how these apps work and whether they’re the right choice for you.

What Is Buy Now, Pay Later?

To begin, what even is “buy now, pay later” when it comes to making a purchase? In essence, this is a type of instalment loan. That means you get your purchase right away without needing to pay for it in full at the time of purchase. Your purchase is instead divided into multiple equal payments, and the first payment is due at checkout.

Throughout the life of your instalment loan, the remaining payments are billed directly to your debit or credit card. Once your loan is paid in full, you no longer owe anything on your buy now, pay later loan. However, many of these apps offering BNPL loans come with:

  • Interest rates
  • Fees
  • Late penalties
  • Limitations

While it’s true that some BNPL apps charge none of the above, it’s always important to read the fine print before agreeing to any type of finance. It’s tempting to use a buy now, pay later scheme when you’re making a big purchase, but this could lead you to buy more than you can afford.

How Do Buy Now, Pay Later Apps Work?

Compared to traditional loans, how do BNPL apps work? They’re actually very similar to traditional loans. You’ll need to fill out a short application, and not every applicant will qualify. Your application will ask for your name, date of birth, payment method, and so on. It’s likely to perform a soft credit check, though you might still qualify even with poor credit.

Depending on your application, you’ll receive your finance terms. You might have larger payments, smaller payments, or an interest rate. For example, if the total purchase is $500, you might have 5 payments of $100 spread over the course of several months. Most companies use what’s called the “pay-in-four” model, spreading payments over four equal instalments.

Buyer beware, however, that fees are likely to add up quickly if you’re unable to make payments on time. This is the catch of buy now, pay later apps. In theory, they can be an effective way to split up larger purchases. That being said, if you can’t make a payment on time, expect hefty fees. If you pay on time, many of these lenders don’t charge interest, but this changes when payments are missed.

What Apps Use Buy Now, Pay Later?

As you spend time online, you’re sure to see more BNPL apps popping up. In Australia, there are already many leading providers you might be familiar with. Below, we’ll share some of the most well-known and trusted Buy Now, Pay Later apps on the market. 

  • Affirm: Used most often with retailers like Amazon, this pay-in-four app always offers zero interest with other monthly payment terms of up to 60 months. Unlike other apps on this list, Affirm doesn’t charge late fees.
  • Klarna: Another option is Klarna which partners with specific retailers like Sephora. Though these plans have no interest, you will pay a late fee if your payment is over 10 days late.
  • Afterpay: Again, as long as you pay on time, there are no late fees with Afterpay. This is one of the most straightforward programs with a pay-in-four model of repayment.
  • PayPal: The well-known online merchant PayPal also has a pay-in-four plan both online and through the mobile app. However, these payments are only allowed through certain retailers.
  • Sezzle: Finally, Sezzle offers a zero-interest option for its pay-in-four plan. Take note that any missed payments incur a late fee of up to $10.

Should You Use Buy Now, Pay Later?

Ultimately, whether or not you use BNPL apps depends on your financial situation. If you’re making a planned purchase you know you can afford, buy now, pay later instalment plans can help you tackle the cost more effectively. That being said, it’s still a way of taking on additional debt. You should carefully consider taking on debt that’s not necessary, even if it has no interest rate.

There are other alternatives to BNPL apps. For example, you might choose a credit card with a zero-interest period to earn travel points or other perks. There can be additional risks to using BNPL apps since they’re new and have looser regulations. Like all financial decisions, proceed with caution.

Do you need help affording an upcoming purchase? If so, the team at Debt Busters are here to help. Contact a member of our skilled team on 1300 368 322 for support every step of the way.

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