Buy Now Pay Later How Does it Work?

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You might have seen a “Buy Now Pay Later” (BNPL) option to pay installments, at the checkout while making a purchase. It is a growing trend among retailers nowadays, to offer these instant approval point-of-sale loans.

What is Buy Now Pay Later?

Buy Now, Pay Later, or BNPL, is a type of installment loan. It basically divides the purchase into multiple equal payments, with the first due at checkout. The remaining payments are then billed to your debit or credit card. This continues till the purchase is paid in full.

These plans can come with interest and late fees, though some plans, depending on the provider, charge neither. It is necessary to make sure you understand the repayment terms to which you agree. Some companies could ask you to pay the remaining balance with biweekly payments over a month-long period. Others may give you three months, six months, or even longer to pay off purchases. It is also important to know how the payments work so you can plan your budget accordingly.

Generally, an outside company is the one extending the offer. For example, when you buy an iPhone, and opt to pay in installments, the purchase is financed through a third-party company, and not Apple itself. Credit card companies have also gotten on board, offering cardholders an opportunity to make installment payments for a set fee instead of accruing revolving interest charges.

How does Buy Now, Pay Later work?

As mentioned, at the checkout, you see an option to break up your total purchase and pay a smaller amount at the moment, instead of the full balance. Buy Now, Pay Later allow you to make purchases online and pay them off over time in weekly, bi-weekly, or monthly installments.

If interested, you fill out a short application directly on the checkout screen. It might ask for information such as your name, address, phone number. You have to fill out a payment method as well. Approval is instantaneous, usually in seconds! Once approved, you make a small down payment, such as 25% of the overall purchase amount. You then pay off the remaining amount due in a series of interest-free installments. Payments are deducted from your debit card, bank account, or credit card automatically. The plan you are offered varies according to provider, but several companies offer a “pay in four” model, which divides the purchase into four equal installments. Each is due a couple of weeks apart, while the first payment has to be made right away.

Consider the following example: if your total purchase is £500, you need to pay £125 at checkout. There are three remaining payments due of £125; each has to be paid two weeks apart. As long as you make all payments on time, you can pay off your purchase in six weeks. While a pay-in-four plan doesn’t usually charge interest, other BNPL plans can charge an annual percentage rate up to 30%. Late fees range from £5 to £10 and are sometimes capped at 25% of the order value, depending on the company.

Heed this warning…

As per Section 75 laws, your credit card provider must protect purchases over £100 for free. If there are misplaced goods or damaged items, you might get a full refund. But remember that this rule doesn’t apply when a third-party payment processor severs the direct link between a retailer and credit card company, which sometimes happens when using PayPal.

When you use BNPL to purchase an item, the direct link gets broken. In case something goes wrong, you can’t contact your credit card provider to pursue a Section 75 refund, even if the goods haven’t reached or are faulty. You have to take it up directly with the retailer or opt for a chargeback request. Make sure you find out if the BNPL provider offers any kind of protection.

This type of payment plan has been available for years, but as people switched to online shopping during the Covid-19 pandemic, it shot up in popularity. You can now use Buy Now Pay Later at most major retailers, but whether you should depends on the plan and your financial situation. Ideally, this type of plan is beneficial to both sellers and buyers as the ability to make multiple payments over time can make a purchase seem more appealing to shoppers and result in more sales for the vendors. But using a BNPL offer may not always be a wise move, especially if it encourages spending more than you can afford!

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