What is Buy Now, Pay Later and How Does It Work?

Key insights:

• With a buy now, pay later (BNPL) plan, you can break up a medium or large purchase into multiple, smaller payments over time
• Using a BNPL plan can help provide financial flexibility, but it's crucial to understand how the payment plan works so you don't end up overpaying for the original purchase
• Citi^® Flex Pay is an alternative to BNPL plans that allows eligible Citi cardmembers to set up a no-interest payment plan for qualifying purchases 

Buy now, pay later (or BNPL) is a form of financing that allows you to break up your total purchase into fixed monthly payments that are paid back over a defined period of time. Usually, BNPL service providers charge a fixed interest rate or fee, but other pricing structures may also apply. Essentially, it's a short-term installment loan that may give you more financial flexibility when making medium to large purchases.

Pay-over-time options are also becoming a familiar part of how some consumers manage purchases. Let’s explore how some BNPL programs typically work, how to use one and tips for using it responsibly.

How does BNPL work?

When shopping online, you may see “pay later” or “pay over time” as a payment option at checkout. If you agree to the terms provided by the specific BNPL service, the service will allow you to split your total purchase into several smaller payments that are then paid back over time.

These installment lending plans typically feature monthly or bi-weekly payments, which may be automatically pulled from the source you specify, such as a checking account or your credit card. Basically, you're taking out an unsecured loan to make the purchase.

In many cases, you can access third-party BNPL platforms through merchant websites at the time of purchase. These platforms will provide varying payment options like “pay in 30 days” or “pay over time.” They often require a credit check and an application.

Alternative to BNPL

As an alternative to BNPL, you may check to see whether your credit card offers structured plans to “pay over time” as a benefit. For example, Citi offers eligible credit card customers the opportunity to repay qualifying purchases in fixed monthly payments with Citi^® Flex Pay.

The ability to pay over time with a BNPL plan or a credit card payment plan like Citi^® Flex Pay may help you fund medium to large purchases, such as a new TV or piece of furniture. Additionally, the flexibility to pay off a purchase in several small fixed monthly payments can help to make it easier to manage your budget when you need to cover a big, unexpected expense.

What to consider about BNPL programs

Before you choose to pay over time, there are several important factors to consider.

1. Payment plans and costs

Whether you use a BNPL plan or take advantage of a pay-over-time credit card benefit, you may also want to consider how many payments you can commit to, as well as the repayment amount and frequency of your installment agreement.

It’s also important to understand how interest and fees are assessed. BNPL plans may be APR- or fee-based. While these plans can give you the flexibility you need to split up your purchase, you also need to make sure the additional costs work for you. Some Citi^® Flex Pay plans have no fees. In other cases, there may be a Plan Fee or fixed APR.

Failing to meet payment obligations could result in additional interest charges or penalty fees.

2. Eligibility

To qualify for a BNPL installment plan, lenders generally check the following criteria:

• Your credit score and credit history
• The cost of your purchase
• The funds available on your payment method, such as your credit card
• Your income
• Your prior history with the BNPL provider or credit card issuer, which can include how long you’ve had an account, past purchases, payment history and outstanding loans

It’s also important to note that your creditworthiness may be evaluated each time you opt to use an individual BNPL service.

If you use a pay-later program through your credit card instead, a credit check and an application may or may not be required to get started. It’s important to check the requirements upfront. In the case of Citi^® Flex Pay, there is no credit check or application needed since it is a benefit of your existing Citi credit card.

3. Credit card rewards

If you use a pay-over-time plan through your credit card, you may also be able to continue to earn points, miles, cash back or rebates or a statement credit on those purchases, depending on the type of rewards your card offers.

Using buy now, pay later responsibly

Whether you use a BNPL plan or a pay-over-time credit card benefit, it’s important to make sure you responsibly manage the payments to help avoid late fees and remain in good standing with your bank or fintech. Depending on your repayment method, you may want to set a reminder to review the connected account to make sure those will go through smoothly.

Here are some other tips to keep track of your purchases made with a pay-over-time provider:

• Carefully review the program terms and conditions: Look for fees and interest rates so that you're aware of the scope of the repayment agreement before you finalize your plan.
• Consider how the payments fit your budget: Make sure you can afford the payments to avoid running into possible late fees and defaulting on your plan.
• Prioritize no-interest BNPL payment plans, if possible: These options may help you save on interest, compared to alternatives where the fee or APR may be higher.
• Limit how many BNPL plans you have at one time: This way, you may avoid potentially overstretching your personal finances and having trouble sticking to the repayment plan.

In general, some pay-over-time programs can provide alternative ways to pay that may make it easier to plan for certain purchases. If you use these tools responsibly, you may be able to avoid potential pitfalls while capitalizing on the benefits.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service