The Truth About Buy Now, Pay Later: What Members Need to Know

With economic headwinds on the horizon, many households are concerned about the affordability of items—and may be considering making more “buy now, pay later” purchases. In fact, a recent survey found that around one in four Americans have used a buy now, pay later service to shop for groceries.  

What Is Buy Now, Pay Later? 

Buy now, pay later isn’t a traditional method of payment, like paying with cash or a debit card. Instead, buy now pay, pay later is an installment loan: allowing you to make a purchase immediately using borrowed money, then incrementally pay off the borrowed sum over a set time period.  

Common buy now, pay later services include Klarna and Afterpay. Other payment services, such as PayPal, also offer buy now, pay later services; and you may see similar offers from retailers, credit cards or payment apps. The Harvard FCU Cards App, for example, now gives users the option to split up large qualifying purchases into equal monthly installment payments at a lower rate.  

What Are the Advantages and Disadvantages? 

The main advantage of buy now, pay later is the same advantage you get with any type of loan—the ability to make a purchase when you don’t readily have funds available. Buy now, pay later usually doesn’t entail a hard credit inquiry, so you may be able to access this borrowing option without impacting your credit history. This is why Buy Now, Pay Later may be a useful tool for people unable to access traditional methods of borrowing because of a low credit score. In addition, some buy now, pay later services are interest-free, so you can pay when it best suits your budget instead of racking up interest like you would with a traditional loan or credit card.  

On the other hand, some buy now, pay later services do charge interest, and may charge hefty fees if a payment is late or missing. Buy now, pay later services rarely have the type of travel or cash-back rewards you’d get with a credit card; and another potential disadvantage is the risk of overextending your finances. In other words: buying things you can’t afford. And, keep in mind that some buy now, pay later services may limit the price or types of products which are eligible to purchase.  

Will My Credit Score Be Negatively Affected? 

Typically when you apply for a loan or credit card, the lender performs a hard credit inquiry to determine your credit worthiness. This type of inquiry is recorded in your credit history and can lower your credit score. One advantage of buy now, pay later is that lenders don’t typically perform a hard inquiry—so users can take advantage of the installment loan, with no impact on their credit score.  

However, it’s very important to remember that a single missed payment with buy now, pay later can lower your credit score and remain on your credit report for up to seven years. Moreover, even when you do make on-time payments with a buy now, pay later service, this is typically recorded as a short-term loan and may decrease your credit score by lowering the average age of your credit accounts. 

Is It Safe to Buy Now, Pay Later? 

As long as you choose a trusted buy now, pay later provider and make all payments on time and in full, it’s perfectly safe to use a buy now, pay later service. Look for a service with straightforward terms and conditions, and pay special attention to the fine print around interest and late fees. As always, review your credit report regularly and speak with a financial counselor if you have more questions about how to use buy now, pay later or how it might affect your credit.