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Buy now, pay later apps: What you need to know

If you’ve been indulging in some online shopping lately, you may have noticed an extra payment option at checkout. Whether the service goes by PayPal Credit, Sezzle, Klarna or some other name, they all let you do one thing: Buy now, pay later — or BNBL.

These services might sound enticing, allowing you to split up a purchase into several payments spread over the course of a few weeks or months. You often won’t pay interest or fees as long as you follow the payment terms.

While opening an account is quick and easy, it’s best if you slow down and check out the pros and cons before signing up. Here’s what you need to know.

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Here’s why people love to buy now and pay later

BNPL services generally make it easier to buy expensive items. You typically make the first payment when placing the order, using a credit card or debit card. Then, the company automatically charges future payments on pre-specified dates. Shoppers may also benefit from these features:

Opening an account won’t ding your credit

Every service has its own process, but most perform a soft credit check if you’re opening an account for standard installment payments. These so-called “soft” inquiries of your credit report won’t impact your credit score.

This “makes it easy to get approved, regardless of credit issues you may have,” said Tara Alderete, the director of enterprise learning at credit-counseling nonprofit Money Management International.

Other financing options provided by these companies may include a “hard” credit check that can ding your credit score.

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You might not have to pay interest

As long as your payments are made on time, you won’t have to worry about extra costs.

It’s quick and convenient

If you don’t have a credit card or you’re close to the limit, these services offer a convenient way to make a purchase. These services “work a lot like layaway,” Alderete said, “but the biggest difference is that you don’t have to wait until your purchase is paid off to start enjoying it.”

Automatic payments can help you stay on track

BNPL services usually take money from your bank account or charge the payment to a credit card. That means you won’t have to worry about making late payments or incurring late fees — as long as the funds are available.

The downside of buy now, pay later services

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(Photo: Getty Creative)

BNPL services tend to separate the act of buying from the act of spending, making it all too easy to buy things you normally wouldn’t at full price.

The interest costs are high — if you pay them

If you don’t pay off your balance within the promotional period, you might have to pay all interest that accrued since making the purchase — even if there’s only a few dollars remaining. The regular interest rates are typically higher than the average credit card APR.

You might pay late fees and other charges

Late fees come into play (around $10–$15) if the BNPL service has trouble processing your automatic payments. But depending on the type of payment you set up, that’s not the only cost you’ll need to worry about. Your bank may charge an insufficient funds fee if the payment pushes your checking account balance past zero, while a credit card issuer may charge interest.

BNPL won’t help you build a positive credit history …

These services tout no credit checks, but “that means timely payments and responsible use won’t help you build your credit,” Alderete said.

But these services could still hurt your credit scores

BNPL companies may report late payments to the credit bureaus, which can affect your credit score. In a Credit Karma survey, 38% of respondents said they missed at least one payment — and nearly three-quarters of people with a late payment reported a credit score drop afterward.

There’s a dollar limit

The amount you can “pay later” depends on your creditworthiness, but it’s usually less than a credit card limit — around $600 to $1,500.

How to manage BNPL services

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Ask yourself these questions before signing up for a buy now, pay later service:

  • Can you afford the full price of the item? As with any credit option, one of the biggest risks is buying something you can’t comfortably pay back.

BNPL options “can lead to impulse buying and quickly get out of control,” Alderete said. “The best way to avoid this temptation is to build a solid, workable budget, and take steps to practice healthy spending habits and avoid living beyond your means.”

  • Can you make your payments on time? You likely won’t be able to choose the dates payments are taken from your account, and these payment dates can’t typically be changed, Alderete said.

“So you’ll want to plan ahead to make sure the money is in your account to avoid paying late fees,” Alderete said.

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