Buy Now, Pay Later (BNPL): What it is and how it works

Buy Now, Pay Later (BNPL) lets people buy things today and pay for them over time in installments. It shares similarities with more traditional loans, credit cards and layaways. But there are important differences in the application process and how interest and fees are charged.

What you’ll learn:

• BNPL is typically a short-term financing option that lets you make purchases and pay for them in installments.

• BNPL plans might offer quick approval and low- or no-interest payment plans. But watch out for fees and lack of consumer protections.

• When lenders report loans and payment activity, the information could show up in credit reports.

• Credit-scoring companies, including FICO®, are incorporating BNPL loans into credit-scoring calculations.

BNPL is a type of short-term installment loan that allows a borrower to pay for a select purchase over a set period of time. BNPL loans are often interest free, assuming the balance is paid on time. 

That means you don’t pay the full cost of the purchase up front. Instead, you make fixed payments toward the purchase until the balance is paid in full. For example, you might be able to buy a pair of shoes costing $100 by paying $25 each month for four months.

BNPL plans work similarly to installment-based credit, like personal or auto loans. The retailer receives the entire balance at the time of purchase and you repay the BNPL provider in smaller payments over time. They aren’t all exactly alike. But if you decide to use this payment method, the steps generally work like this:

1. Select BNPL. Choose a BNPL payment option at checkout, if it’s available. Participating retailers usually offer them via payment platforms like Affirm, Klarna and Afterpay.

2. Apply. The Consumer Financial Protection Bureau (CFPB) says you need to provide personal information, including your name, email address, phone number and date of birth. You also must have a debit card, credit card or bank account for payments.

3. Wait for a decision. BNPL providers generally don’t conduct a hard credit inquiry when you apply, but they may perform a soft credit check. Approval can take anywhere from a few seconds to a few minutes. And if you’re approved, you can complete your purchase.

4. Choose your payment schedule. These can vary, but the most common is known as “pay in four,” where you make four interest-free biweekly payments. Sometimes the first payment is due at checkout and automatically deducted, but it could also be due two weeks later. This amount is typically 25% of the purchase price.

5. Pay. Remaining payments are then usually automatically deducted from your credit card, checking account or savings account. For example, if you initially paid 25% of the purchase price on a $2,000 item, you’d owe $1,500 spread equally over your remaining payments. If you had three payments left, that would come to $500 per payment. Most plans charge fees if you pay late. 

BNPL loans aren’t managed through the retailer—they’re considered a line of credit from a separate company. 

Most BNPL loans don’t come with interest or finance charges, such as origination fees. But there may be fees for missed or returned payments, among others. So it’s a good idea to read each loan’s fine print before you apply. You can also set up automatic payments from your credit card to make sure your bills are paid on time.

You might also want to consider the protections the BNPL provider offers. For instance, do they have dispute resolution and fraud protection services? According to the CFPB, “Borrowers seeking Buy Now, Pay Later credit may encounter products that do not offer protections that are standard elsewhere in the consumer financial marketplace.”

Yes, BNPL can affect credit scores if it’s reported to the credit bureaus. In the past, BNPL lenders didn’t report to any of the three major credit bureaus: Equifax®, Experian® and TransUnion®. But that’s changed. As more BNPL providers have started reporting to the bureaus, FICO—one of the main credit-scoring companies—has introduced a tool that can incorporate this BNPL data into credit scores. 

Eventually, this means borrowers could potentially build their credit with on-time BNPL payments. In the meantime, missed payments that get reported to the credit bureaus can still hurt your credit scores. 

If you use CreditWise from Capital One to monitor your credit scores, you might see your BNPL loans in credit reports and CreditWise alerts. That’s because CreditWise gives you access to your TransUnion credit report, which includes BNPL data in consumer credit reports whenever it’s reported. You can also get free copies of your credit reports at AnnualCreditReport.com.

Another way that BNPL credit could affect your credit scores is if you don’t repay the loan and it’s turned over to a debt collection agency. If a collections account shows up in your credit report, TransUnion says it will stay there for seven years and negatively affect your credit scores.

Having BNPL loans could affect credit scores. But there’s more to consider about how to use BNPL loans responsibly. 

Some lenders may allow you to pay for your purchase with a credit card, but that could mean paying off one form of debt with another.

If you use your bank account to make BNPL payments and don’t have enough funds to cover a payment, your bank may charge you an overdraft fee. That’s sometimes referred to as a nonsufficient funds (NSF) fee.

Here are some of the advantages and disadvantages to keep in mind if you’re considering a BNPL program:

BNPL is a short-term payment option that lets people repay purchases over installments. Because it’s relatively new, there are things about its role and impact that are still unclear and evolving. And that includes when and how it might affect consumers’ credit.

You can keep an eye on your credit scores with CreditWise. And if you think a credit card might better suit your needs, you can compare Capital One credit cards to find the right fit for your goals and financial situation.

If you’re new to credit or searching for your next credit card, Capital One can help:

• See whether you’re pre-approved for credit cards without harming your credit scores. 

• If you’re looking to build your credit with responsible use, explore cards for people with fair credit. 

• Earn unlimited 1.5% cash back on every purchase, every day, with a cash back rewards card. 

• Monitor your credit report and score with CreditWise. It’s free for everyone, and using it won’t hurt your credit.