When to Buy Now, Pay Later, and When to Just Pay Now

Research firm Kaleido Intelligence estimates that by 2025, online consumers around the globe will have nearly doubled the amount of money they spend using buy now, pay later services to $680 billion.

As these apps grow in usage, so do complaints. Regulators in the U.K. have curbed the ways in which buy now, pay later companies can advertise their services. Last year, a California oversight board required several of these companies to refund consumers hundreds of thousands of dollars.

A recent national survey of nearly 3,500 adults found that one in five Americans made a purchase using a buy now, pay later service in the past year. The survey, conducted by research firm Momentive, also found that one in six Americans who used such services regretted doing so, citing high interest rates, minimal options to build their credit, or simply having bought things they couldn’t really afford.

“What jumped out at me right away is that the appeal of buy now, pay later is the same as the potential problems,” said Jon Cohen, chief research officer at Momentive, formerly SurveyMonkey.

Buy now, pay later services say they are a better alternative to traditional banking and credit institutions, offering access and flexibility to credit-spare consumers. An Affirm representative said that it underwrites loans for individual purchases rather than extending a single line of credit, a process that is partially based on a consumer’s ability to pay it back. Klarna said that its policy of revoking access after missed installments—and increasing purchase limits according to on-time payment behavior—is designed to encourage responsible spending.

Here’s what you need to know about buy now, pay later apps and the important differences between the services.

Make the Payments, or Pay Interest

Payment schedules vary among the services, but generally the cost of a purchase is split into four interest-free installments paid over six weeks.

Afterpay customers are required to repay in full within six weeks. When customers miss a payment, the company revokes access to the Afterpay platform and charges a late fee for the missed installment. The company said 95% of transactions don’t incur late fees.

Affirm allows the flexibility of spreading purchases anywhere from six weeks to 60 months, with 0% to 30% interest, the company said, depending on the merchant, product and its underwriting process. The company said its biweekly payments are always interest-free.

Affirm’s interest rate and options are determined by purchase amount, merchant terms, credit usage and other existing loans the consumer might have with the company. If you purchase a $1,000 sofa with Affirm and choose to pay it off over a year, you could be offered a 16% interest rate. That means you would pay about $97 per month.

Keep track of your purchases carefully, said Chelsea Ransom-Cooper, managing partner and financial planner at Zenith Wealth Partners. Using this method of payment for multiple, concurrent small to midsize purchases can stack up quickly, said Ms. Ransom-Cooper.

Repayment for most of the services is automated by default. Klarna requires users to connect their debit card, credit card or bank account, for example. Most services also send text reminders of an upcoming charge.

When to Use It

Only use buy now, pay later for things you can’t pay off on your monthly credit-card bill, said Ms. Ransom-Cooper.

“Leaning on these apps for emergency purchases can be a helpful way to give yourself a little more time than your credit card will,” she said.

Another benefit of these services are the favorable terms of borrowing for those with little credit or a short credit history, especially for larger purchases, according to financial analysts.

If used responsibly, buy now, pay later services can “level the playing field” for those shut out of credit access, said Sheridan Trent, a research analyst at the Strawhecker Group, a consulting firm that focuses on electronic payments.

Know What You’re Not Getting

Even though consumers are encouraged to essentially borrow money and pay it back in a timely and responsible manner—as they would with a credit card—those payments don’t necessarily help them build credit history, said financial analysts and authors.

“You’ve taken out a loan that, because it’s not a revolving credit line, the chance for it to be negatively on your credit, as opposed to positive, is higher,” said Grant Sabatier, co-founder of BankBonus.com and author of “Financial Freedom,” referring to Affirm loans.

Affirm doesn’t report payments on its four biweekly payment zero-interest loans, it said, or when consumers are offered a three-month payment option with no interest. Afterpay doesn’t work with credit bureaus at all. Sezzle Up explicitly informs users that it will report on-time payments to Equifax and TransUnion.

Missing a Payment

Just as with a credit card, there are consequences to late payments for buy now, pay later services.

Affirm doesn’t charge late fees, but late or partial payments can hurt your credit score, and may prevent you from using the service in the future. Sezzle Up also reports delinquencies.

Klarna and Afterpay revoke access to their platform until payment is made. Both companies also charge late fees, tacked onto your next payment. Afterpay charges $8, or 25%, of the purchase, whichever is less, while Klarna charges a maximum $7, or no more than 25%, of the past due amount. Klarna said it will contact users to collect payment before charging a late fee.

Financial planners stress the importance of keeping track of your installment payments, as you would any bill.

“Documenting the payment schedule will help you factor the payments into your budget,” said Ms. Ransom-Cooper.

Kristen Euretig, a certified financial planner and founder of Brooklyn Plans, said new clients of hers who use buy now, pay later apps often pay the first installment and forget about the remaining charges during the intake session.

“It’s not something that occurs to people,” she said. “Student loans, of course. Credit cards, yes. And then this is technically a debt that needs to be repaid. So it seems to not stick in people’s minds the same way.”

Try Not to Make It a Habit

Buy now, pay later apps are built to encourage repeat purchases by making it easy to buy items without paying full price immediately, said Mark Palmer, managing director and fintech analyst at financial-services firm BTIG.

“It becomes almost part of their lifestyle as a consumer to purchase things using buy now, pay later and get access to them weeks before they would be able to otherwise," said Mr. Palmer.

The services are designed to remove as much friction from the checkout process as possible, which can make spontaneous purchases easier and faster, says Ms. Euretig.

“It’s very savvy,” she said. For most of the services, the pay later button is right next to the buy button. This makes it just as easy for a consumer to choose either option.

“There’s an exit door from the realization that you can’t afford this right now.”