Whoops! Your finger slipped and you clicked on a Reformation dress that’s the cutest—but also $175. Except, wait, right below the price, it says, “Or four installments of $43.75 by Afterpay,” and you’re like, Excuse me, what? You have so many questions. Here are the answers you need.
Q: How does this even work?
“Buy now, pay later” (or BNPL, as the cool kids say) is exactly what it sounds like: a service that lets you break up payments on expensive things so you’re not dropping a ton of cash all at once. A bunch of new companies, including Afterpay, offer it. You just sign up for an account, pass a quickie credit check (although Afterpay doesn't require credit checks), then shop for items on the BNPL biz’s site or in its retail partners’ stores.
Q: Can’t I just use my credit card tho?
I mean, yeah, but CCs are kinda the reason these programs exist in the first place. Our generation is terrified of debt, even though most people opt to do the least re: their credit card bills...as in only pay minimums, not realizing they’ll accrue more debt in the long run thanks to interest. BNPL programs set strict due dates—usually biweekly or monthly—so you’re less able to blow off payments. But quick reminder to read the
fine print. While CCs have an average national interest rate of around 17 percent, some BNPL plans can charge up to 30.
Q: So I can just ball out and buy everything now?!
Most BNPLs keep you in check with spending caps and warnings. If you’re, say, late with an Afterpay payment, the company will cut you off until it’s settled. No more damage done. But keep in mind that being late at all could have a negative impact on your credit score.
Q: Sorry, what was that about my credit score?
BNPL programs can (and do!) report to credit bureaus. Meaning: Not being on top of your shit could tank your score. This is important if you want to buy a car or house anytime soon, especially if you’ll need a loan. It’s harder to get approved for one if your credit score is sad, according to SoFi certified financial planner Lauren Anastasio. If you’re smart, though, you can spin this: Responsible younger folks who need to establish a good credit history can use BNPLs to build up their score by paying off everything on time. You reliable adult, you.
Q: How do these companies make $$$?
Late fees and interest. But also: Most of their moola comes from charging retailers transaction fees on every BNPL purchase. Basically, they get a cut from each customer’s cart. There’s some crafty ~psychology~ going on here too. BNPLs know that shoppers are way likelier to buy more stuff if they don’t have to pay full price. More stuff = better business for both the OG seller and the BNPL. So stores actually pay BNPL companies for the promise of impulsive repeat customers who get hooked on the ability to keep getting cool stuff for cheap. Make sense?
Q: So should I just use this for swanky investment pieces?
Sure! In fact, $100+ purchases for once-in-a-while occasions are best. Anastasio admits that even she financed a pricey Gravity blanket over Black Friday. “It’s okay if it’s uncomfortable to pay for something all up front,” she says, “but buying now and paying later isn’t a habit that you should develop.” It’s easier to keep track of a handful of large payments versus a ton of bitsy ones.
Q: What happens if you’re on multiple BNPL programs?
Since every retailer partners with a specific program, you *could* be tempted to sign up for more than one. Before you do: Think of this like having multiple credit cards. You’ll have to stay very on top of all your accounts to ensure you can still, you know, pay rent. Many BNPLs also use auto-pay settings, which could spell overdrafting (ugh).
Q: Should I just wait and save up, then?
“In a perfect world, I’d want you to ask, Am I willing to save for this?” says Anastasio. But no one’s life is meticulously preplanned. So if you need to use a BNPL for a job interview outfit or a luxe Insta-bait bag (right this way, sorry!), go ahead. As long as you’re ready to pay it off, and soon.
Just one scenario played out across the most popular BNPLs and an old-school CC.
* The average credit-card interest rate from 2019's third quarter, according to the Federal Reserve.
** The average maximum late fee, according to a 2019 U.S. News consumer credit-card study.
Editor's Note: In the April 2020 issue of Cosmopolitan, we listed Afterpay's max. late fee as "25% of the original value." We've corrected it here. In the instance of a $500 purchase, the max. late fee would be $24 if you were late on the last three payments. Afterpay's late fees cap at $24 or 25% of the order value–whichever is lower.
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