Hoping to pay in installments? Here's what to know before you buy.

By Lauren Phillips
July 14, 2020
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It seems too good to be true: You’re shopping online, eyeing a pair of shoes that are just a little more than you’d like to spend right now. A small icon next to the price (and that enticing add to cart button) gives you the best possible news—you don’t have to pay all that money right now. You can pay for it in installments, breaking up the high price into payments that seem—dare we say it—positively affordable.

Offers to buy now and pay later are more and more common online with the rise of installment payment services (technically point-of-sale loan providers) such as Affirm, Afterpay, and Klarna, all rising buy now, pay later (BNPL) stars in the U.S. With some 23,000 retail partners in the U.S. between the three services, these payment options are almost ubiquitous sights for online shoppers. You may recognize the names, but understanding how Affirm, Afterpay, and Klarna (and services like them) work is a whole other matter.

First: That instinct that it’s too good to be true isn’t completely off-base. Of course there are certain terms you must abide by to use these services—making your installment payments on-time, for example. They’re not consequence-free loans. But these services aren’t necessarily a dangerous scam, either, even if they are a little unfamiliar. (They are certainly less likely to land you in a cycle of debt than payday loans.)

In practice, installment payment services operate much like credit cards or store financing. When you make a purchase and choose to use the service, it essentially pays the full price of your purchase to the store or merchant. You then pay regular installments to the service, not the merchant, from a credit card, debit card, or bank account until you’ve repaid the full cost of your purchase. Your order will be shipped right away—no waiting until your purchase is paid off to get your goods, as with the old-school layaway system.

The size and frequency of your payments will depend on the service you use, though many rely on a system in which the purchase price is broken into four payments made over about six weeks. With this system, your first payment is due at the time of purchase, and then you have a payment due every two weeks until all three remaining payments are made (six weeks). For the most part, if you make all your payments on time, you’ll pay no fees or interest.

You’re likely used to the monthly billing used by credit cards and utility companies: Why two-week increments? “It really coincides with how often people are paid, and how they’re budgeting out their expenses,” says Melissa Davis, chief revenue officer at Afterpay. Instead of budgeting monthly, based on your credit card or bank statement, rent due date, and other bills, many BNPL services allow people to budget based on when they’re paid.

If you’re not paying fees or interest, you may be thinking, how do these services make money? (Fair question.)

Mainly, services such as Affirm, Afterpay, and Klarna make money from the online stores you’re shopping from. They charge retail partners a fee, and in return, those retailers tend to see higher sales and larger purchases from people using the services to make their online splurges more affordable. Unlike lenders or credit card companies, the bulk of these companies’ earnings are coming from other companies, not from borrowers, though some do take in a small amount of money from late fees and interest payments (more on that later).

Anyone 18 or older with a credit card, debit card, or bank account can sign up for a BNPL service. You can make an account with the service of your choice for quicker shopping with participating retailers or simply select the option at checkout, but all services have encryption technology to keep your information safe and secure.

Generally speaking, Affirm, Afterpay, and Klarna are very similar, but they do each have their own distinct offerings, terms, and processes that may make one more appealing than the others. Read on to learn how Affirm, Afterpay, and Klarna work.

Affirm differentiates itself from credit cards by rejecting late fees, hidden fees, and compound interest—all common contributors to credit card debt. (Launched in 2012, it’s also the oldest U.S. BNPL service.) When you purchase something through Affirm, you pay no late fees (even if you have a late payment)—but Affirm does charge interest.

Affirm approves users through a soft credit check, which won’t affect your credit score, though it can show up on your credit report, where it has no impact. Qualifying to use Affirm takes just a minute; once you’re approved, Affirm will show you exactly how much you owe, with no gimmicks. The price includes the cost of your purchase and any interest you’re charged; Affirm does offer 0 percent interest, but be aware that rates can go much higher, depending on several factors. You’re given the option to repay your loan over three, six, or 12 months—the length of your loan could affect your interest rate, but Affirm allows you to consider all the options to find the repayment process that’s best for you.

Users can connect their Affirm account to a credit card, debit card, or bank account; payments will be deducted automatically from the payment method on the agreed-upon basis. The important shift is that Affirm will show users how much they owe, including interest, before they buy: You won’t have to pull out a calculator to figure out how much financing will end up costing you, and you’ll pay less than you would have on a credit card, thanks to Affirm’s commitment to simple interest instead of compound interest, which can build on itself. (No deferred interest here, either.)

The appeal of Affirm over a credit card is that users know exactly how much they’ll end up paying from the start. If they miss a payment, they’ll be nudged to make up the payment as soon as possible, but no late fee will be charged. Unlike other services, Affirm will report on-time payments back to Experian, a credit bureau. On-time payments and responsible borrowing can actually improve your credit score. At the same time, making a very large purchase or using too much of your credit with Affirm (also called having a too-high credit utilization ratio) can hurt your credit score.

With some 15,000 retail partners in the U.S., Afterpay has the furthest shopping reach of these BNPL services or point-of-sale loan providers. (Afterpay even just announced a new in-store shopping feature that allows shoppers to use the service for in-person purchases at participating retailers.) Afterpay offers interest-free installment payments spread over six weeks, with a payment due every two weeks (and one due at the time of sale). The cost of the item is divided evenly across those four payments, with no added interest.

When a payment is due, it will be automatically deducted from your payment method. You’ll receive a reminder ahead of time, so you can double-check that the payment will go through. After a brief grace period, Afterpay does charge late fees for delayed or missed payments: $8 for a late payment, with fees capped at 25 percent of the purchase price if multiple payments are missed. (Borrowers will be unable to use Afterpay again until they make any outstanding payments.) With capped fees, accumulating a huge mountain of debt through Afterpay would be difficult.

Afterpay does not run a credit check—not even a soft one—and approval is instantaneous. When you sign up for an account or apply to use Afterpay (essentially applying for a point-of-sale loan from Afterpay), you’ll enter your email address, phone number, billing address, payment method, and birthday, Davis says; you don’t have to share a social security number, and your credit score will not be affected. (Afterpay will text you a code to confirm your phone number.) If you miss payments, it will not hurt your credit score; on the other hand, if you’re a responsible borrower and always make your payments on time, your credit score will not increase, because Afterpay does not report to any credit bureaus.

Klarna gives users the most flexibility in deciding how they want to pay for their online purchases. Klarna offers three options, though not all are available at all retailers. The first (and most popular, offered by all Klarna retail partners) is interest-free installments. This 'Pay in 4' system breaks a purchase into four equal payments that users make every two weeks. (The first is due at the time of purchase.) Late fees of up to $7 are charged if a second attempt to deduct the payment is unsuccessful. The second, Pay Later, allows users to receive their order immediately and pay later (within 30 days) in full, with no interest or fees. Pay Later is not offered by all retail partners, and if they go unpaid past the due date, customers can be blocked from using Klarna in the future, a Klarna spokesperson says.

The third option is offered only by select retail partners and is often used for large purchases. Similar to traditional store financing, it pays for a purchase in full and allows users to repay Klarna over anywhere from six to 36 months. Klarna’s monthly financing does charge interest—Klarna’s annual percentage rate is 19.99 percent, though rates can vary for special offers or promotions—but users may be able to go interest-free by paying off the purchase in full within six months. A late fee of up to $35 can be charged if a monthly financing payment is missed.

Klarna may perform a soft credit check if you apply for the installment or pay later options; a soft credit check will not hurt your credit score, though it may appear as a (harmless) soft inquiry on your credit report. If you apply for Klarna financing, Klarna will run a hard credit check, which could hurt your credit score and will appear as a hard inquiry on your credit report. In both cases, you’ll know almost instantly if you’re approved.

It’s up to you to decide whether any of these BNPL services is right for you. Before you sign up, you should consider a few things.

Firstly, why do you need to break your purchase up into installments? If it’s because you cannot truly afford the item, you may want to rethink your online shopping habit and learn how to budget so you can be sure your purchases are within your range of affordability.

Second, take a look at any debt you may already have. If you already have a substantial amount of credit card debt and you’re looking for another way to keep spending, your time and energy will likely be better spent paying down that debt. If you are working to reduce your credit card debt or want to avoid that high-interest debt all together, a BNPL service might be the right alternative for you.

Davis says the vast majority of Afterpay users put debit cards down as their payment method. Having a credit card and using one of these services is close enough to the same thing that you may not want to do both. (And using a credit card to fund installment payments can just land you in more debt.) Affirm, Afterpay, and Klarna are presented as alternatives to credit cards; those wary of landing in deep credit card debt (or those trying to climb out of it) can still enjoy the convenience and budgeting of buying now and paying later, without the same fees and compound interest.

“We’re all about making sure people aren’t getting into debt,” Davis says.

Lastly, think about your overall financial picture. Credit cards come with risks, but they do have one huge benefit: building credit. Building credit early on (often with a credit card, though there are other methods) can help people get higher credit scores and lower interest rates on loans (think mortgages and car loans) later on in life. If you don’t have a credit card (and don’t want one), consider what that means for your credit: Do you have another method of building credit? If not, you may want to find one, or pick a service that allows you to build credit.

If you do want to wade into the world of buying now and paying later, do your research and try to pick one service that is available at many retailers you know and love. All services place individualized limits on purchase amounts based on a number of factors, including shopping and spending habits. New users may have a lower limit, but most services increase that limit for repeat users who make on-time payments. If you’re a big spender (and you can afford to pay it all off), sticking with one service will make it easier for you to make bigger purchases responsibly.