# Buy Now Pay Later: What is it and How it Works?

Paying in installments has been common for a part century, but it gave customers only two options; first was paying for the items in portions and receiving it once it's completely paid for. The other was putting items on a credit card.

Nowadays, almost everyone has a credit card — 79% of the people in the United States possess at least one credit card. However, layaway payment plans have become outdated.

A new payment option — Buy now, pay later — has replaced it. Third-party credit specialists manage these BNPL programs. Since the pandemic started, BNPL has skyrocketed, especially among low-income and young customers who do not have traditional payments.

While shopping online for furniture, clothes, shoes, or even concert tickets, you must have seen the option to break the amount into smaller installments.

While merchants do not charge interest on BNPL (though, BNPL vendors charge them a fee), they cover the cost with an increase in sales volume. Moreover, BNPL has assisted customers in equalizing the credit market.

Afterpay, Shopify, Klarna, PayPal, and affirm offer the Buy now, Pay later service. Whether you are a [Shopify ecommerce development services](https://clickysoft.com/shopify-development-services/) company or a merchant starting your business with Shopify, you can use this option easily.

## What is Buy Now, Pay Later (BNPL)?

[Buy Now, Pay Later (BNPL)](https://en.wikipedia.org/wiki/Buy_now,_pay_later) is a type of payment model that allows customers to purchase items immediately and pay for them in installments over time, rather than having to pay for them in full upfront.

BNPL payment plans typically involve a small down payment at the time of purchase and then regular, automated payments spread out over a period of weeks or months. This payment plan can be especially helpful for customers who need to spread out their payments to manage their cash flow.

The popularity of this payment plan is on the rise, as it enables customers to divide their payments into smaller increments over a period of time. Customers typically make a deposit upfront and then make monthly payments until the full cost of the product or service is paid off.

It is a great alternative to traditional forms of payment, such as credit cards, that require customers to make payments in full right away.

## How does BNPL Work?

BNPL is the easiest payment installment method. The customer purchases as usual and gets to the checkout process — the BNPL process begins at the payment process. You pick out your favorite stores, select products, and decide to pay.

Retailers with BNPL vendors have the chance to buy now and pay later to customers. During the checkout, the customer will be presented with the option of making a purchase through the Buy now, Pay Later option along with other options like debit or credit cards.

The retailers don’t have hard and fast rules, they just run a soft credit check when the customer chooses to buy their items through BNPL, customers enter their details with the lender, such as their full address and social security number.

To assure that the customers will pay back the loan, the retailer runs a small credit check on them and analyze their loan history. Soft credit checks don’t get reported to the bureaus, so they won’t affect the customer’s credit as credit checks might.

Companies often hire BNPL vendors who charge a little fee to the retailer. For every purchase through the BNPL method, the vendor will take a small percentage of the transaction which is directly billed to the shopper.

The fee ranges from 2% to 8%, subtracted from the sum the BNPL company sends to the store owners. The entire system is quite similar to the traditional credit card companies’ arrangement with eCommerce vendors.

The customers settle the balance with time. The majority of BNPL vendors give interest-free payments if a customer pays off their installments in a brief period. If customers take longer to repay their debts, the vendors offer multiple payment modes with interest rates.

Like a credit card, the faster the debt is paid off, the lesser will be the total amount.

### **Read Also: [Factors to Consider When Choosing Between a Website and Mobile App](https://hackmd.io/@clickysoft/factors-to-choose-between-website-and-mobile-app)**

## Pros of BNPL For Buyers
BNPL offers many potential benefits for customers. Some of these are:

**BNPL is an alternative for people without credit cards.** As more than 20% of customers don’t have a credit card, around 55% with credit cards have already maxed out their cards’ limit.

However, the BNPL service presents the majority of benefits as a credit card; but for individual and smaller purchases.

**BNPL services can be used like a credit card as well.** Customers request a virtual card number in advance of their purchase. The card number will cover the same amount of money for the complete purchase. All BNPL vendor sites offer this service via website or smartphone.

**BNPL provides customers with adjustable payment options.** Most BNPL services give multiple options to customers at the sale point. As a customer, you can separate your cost between some other payment source or BNPL.
Through BNPL, customers can also choose interest-free payments by going for a short loan period and paying off installments on time.

**Soft credit checks will not impact customers’ credit.** Soft credit checks are run on customers to check their eligibility for a loan. It will not affect your credit score, but overdue payments to the BNPL vendor will be reported to credit bureaus, such as credit card payments.

## Should Customers Use Buy Now, Pay Later?
As a customer, you have several things to consider while choosing the BNPL payment plan.

BNPL is recommended to be used for only necessary expenses, such as a laptop for school and a mattress to sleep on. Though the whole BNPL plan seems low-cost and harmless, it is still debt, and getting into debt for non-necessary purchases is not a clever idea.

Also, go for a BNPL plan with zero or minimal interest to lower your monthly installments; hence, it will be easier for you to pay off the debt. If you are already struggling with your bills and emergency funds, avoid BNPL.

As BNPL is super convenient, people can easily overspend with it. If that happens and you fail to pay, you will incur high fees or be sent to collections which will hurt your credit score.

## Should Retailers Use Buy Now, Pay Later?
As a retailer, you must balance two considerations before using BNPL services. The first one is the vendor’s fees on every purchase, while the other is an increase in the shopping carts of customers who will be using the BNPL service. Most BNPL vendors don’t publicly disclose the vendor’s fee, but it usually ranges from 2% to 8% of the product amount.
## Final Thoughts
The primary purpose of Buy now, Pay later is that customers can buy things immediately — while at the same time getting more time to pay for the expensive items. BNPL financing may seem alluring to you if you can't pay the bill all at once.

The loans will extend your credit without imposing any charges on you; however, with a proper repayment schedule, you will not get into the debt mountain. Though, you should read the fine print carefully before getting into it, because the unknown penalties and interest rates will catch you off-guard.