What is Buy Now, Pay Later?

Video Transcript

Buy now, pay later services have been all over the news after Klarna announced a partnership with DoorDash—making everyone wonder whether putting a hamburger on layaway will be the new norm. But if you have no idea what "buy now, pay later" is, let me break it down for you.

So, even though I was just joking about putting fast food on layaway, buy now, pay later, and layaway are not really the same thing. With layaway, you had to pay for the item in full over a series of smaller payments before you could take it home.

Buy now, pay later is kind of the opposite. You get to take the item home immediately. You just need to pay a quarter of the price upfront, then you pay the rest over the course of six weeks—making a payment every two weeks. These loans are typically interest-free, quick to apply for, and you usually don't see any impact on your credit score.

I mean, this all sounds kind of amazing. So why is there so much concern over these types of loans? Numerous studies have shown that buy now, pay later is getting us all to spend more money. The average amount spent increased by 30 to 50% when using one of these services. There was also a 13% increase in impulse spending, and merchants who use these services saw a 36% increase in shopping frequency. So clearly, these services are getting us all to spend more than we normally would.

Buy now, pay later purchases in the U.S. reached $116 billion in 2023 and are expected to hit $205 billion by 2029. So, I’m curious—do you use a buy now, pay later service? And if you do, why?

Now, let's talk about how these buy now, pay later companies are making money. These services allow you to break your everyday purchases into smaller, bite-sized chunks, all for the low, low price of free.99—and they often don’t even charge you interest. So, are these companies just super generous? Because to me, you know, they have to be making money somehow, right? The answer is: they are definitely making money. And here’s how.

The first way they charge you is with late fees. If you miss one of your scheduled payments, you could get hit with a fee as high as 30% of the payment amount. The next way is service fees. Some services charge a flat dollar amount if you use their app to pay at a store that doesn’t partner with them. Also, there could be interest. Remember I said they don’t charge interest in most cases—but they do if you want a little more time to pay off your purchase. Some offer terms as long as 36 months.

Where the big money is at for these services: buy now, pay later companies take a cut of each purchase made using their service. This is usually between 2 to 8% of the transaction total. And that’s considered justifiable because customer spending tends to jump up by a lot when they use buy now, pay later. They may also charge retailers a one-time setup fee. So, even though these services might look free, they are definitely getting their money.