‘Buy Now, Pay Later’: How Affirm, Afterpay, PayPal Pay in 4 and Klarna Work

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How many times have you added items to your online shopping cart only to be denied the total? While it’s wise to spend within your budget, 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’s Pay in 4 work by offering you micro installment loans. This loan covers the cost of your purchase right away and allows you to pay off 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, the majority of whom are millennials and Gen Z shoppers.

But what are these installment plans and how do they differ from Credit cards Y 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 house, or an education, you’ve probably used an installment loan. Installment loans are lump-sum loans that you pay back over a fixed number of months or years. For products like cars and homes, they are often financed by well-known banks, such as Chase or Wells Fargo.

Mini-installment plans from companies like AfterPay and Affirm act like microloans for everyday purchases like clothing, makeup, electronics, and gym equipment (such as Peloton). Affirm, for example, also supports unexpected purchases like car repairs through YourMechanic. But unlike loans to buy a new home or car, which typically pay off over many years, the products and services financed through these services typically pay off within a few weeks or months.

How do they work?

Each online installment plan offers different settings, but the gist is: you buy your item now, select the plan at checkout with a qualified retailer, create an account, and complete your purchase. With Klarna and AfterPay, you get your products right away, then pay for them in four installments: once when you checkout, and usually every two weeks or once a month thereafter. Affirm has payment options that typically range from three to 12 months, although some plans have terms up to 48 months.

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

To take advantage of an interest-free installment plan, you must shop with retailers who support it. Anthropologie, DSW and Fenty Beauty are AfterPay partners, for example. You may see the installment service 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 will normally 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 as it would if you paid in full at checkout.

You can also buy through the app of each company. Say, After paying, PayPal Y Klarna they all have apps on the App Store and Google Play that let you shop, track your orders, and make payments.

Although they are not like traditional loans, they are different from other types of alternative payment methods. For example:

  • they are not credit cards. A credit card is a revolving line of credit that you are 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 your bill or make payments until it’s paid in full. Generally, if you don’t pay your balance by the end of the billing period, interest will accrue, which can be 20% or more. CNET always recommends pay your loan in full.
  • They are not the same as layaway. Layaway is when she agrees to pay for an item over the course of a few months and once she has paid for it, she can take it home. Layaway typically requires an up-front deposit and service fee, and you don’t receive your products until you’ve paid for them in full. Some installment plan companies require a deposit up front, but you don’t have to wait to receive your item; you get it right away.

How does an installment service affect my credit score?

When you apply for a loan or credit card, that hard credit check looks at your credit history to see if you’re credit-worthy enough to lend. With BNPL applications, there is no hard credit inquiry. If the app checks your credit, it will be a soft credit check, which will not affect your credit score. The services do not specify the credit score you need to shop with them.

If you’re not diligent with payments, your credit score could suffer. For most installment microloans, you must make payments every two weeks and in four installments in total. So if you don’t pay your bill on time, that triggers a late payment for some businesses. All three major credit bureaus will be notified, and you may see your credit score plummet. Late payments are one of the biggest factors in determine your credit scoreand a drop in that could hurt your chances of borrowing money in the future.

Fines and fees vary by company. Affirm and PayPal do not charge late fees. AfterPay does, although these fees will not exceed 25% of the purchase amount. Klarna does not charge a late payment fee, but if you do not make a payment when it is due, you may be blocked from using the site and app in the future. Neither of these services charge prepaid fees, so you won’t be penalized for paying your balance early.

Should I use BNPL services?

It depends on the type of buyer you are and your mindset about money. Here are some pros and cons to consider:


  • You can buy items and services, even if you can’t pay for them right away: If you have things you need or want to buy, you are not required to pay full price at checkout. Installment microloans allow you to pay off your purchase in 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 good credit or a long credit history, this is a good alternative payment option.
  • It’s simpler than a loan or a credit card: If you’ve had problems with credit cards or don’t like using them, this is an easier method than applying for a credit card or a personal loan. You can request it at checkout, while if you want a credit card or loan, you’ll need to wait a few days before you can use those funds.


  • You may think you are spending less: If you cringe at a $1,000 couch, seeing your payments split over $250 every two weeks, for example, tricks you into thinking you’re paying less for an item. In reality, you are still paying the same amount and you are borrowing money to do so.
  • You may be charged interest or other Rate: Depending on the service you choose and the payment plan you select, you may be charged interest. Affirm, for example, offers interest rates between 0% and 30%. While this interest doesn’t accrue like a credit card, spreading that $1,000 couch payment over twelve months at a 30% interest rate could end up costing you $169.76 only in interest.
  • You may not be approved for the full amount: Your credit score may not prevent you from being approved for a BNPL loan, but it is still a factor in determining your loan amount and interest rate (if applicable). That means there’s a chance you won’t be approved for the full amount you’re requesting.
  • it’s still a loan: Remember that you are still taking out a loan, even if you pay it back sooner than you would with a traditional loan. Failure to pay on time could result in interest charges, late fees, or future inability to use the service.

While the convenience of delaying payment sounds appealing as a way to get something now, you’re still obligated to pay your bill in full. If you need something now but can’t afford it, micro installment loans may be a good idea. But if you think you won’t be able to afford payments, you may want to consider another payment method or wait until you have cash available to make your purchase.

Correction, April 30: Affirm has 8.7 million users, more than we quoted above. You also have payment options that range from three to 12 months, a shorter period than the one we mentioned above. Clarified that AfterPay does not charge late fees as long as you make four payments.

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