Ask Penny: I’m planning a big purchase and considering using a buy-now, pay-later app. Is this a good idea?

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Hi, Penny: I need to make a big purchase, but I don’t have the cash on hand to pay for it. Should I use one of those buy-now, pay-later apps I’m seeing everywhere?

—Strapped for Cash

Hey, Strapped for Cash,

Using a buy-now, pay-later app to fund a major purchase can be tempting.

But buy-now, pay-later options can come with high interest rates, late fees and other penalties or costs — so holding off may be better for your long-term financial health, especially if the purchase is a “nice-to-have” versus “need-to-have” item.

Let’s check out the benefits and potential drawbacks of using buy-now, pay-later apps.

How buy-now, pay-later apps work

Buy-now, pay-later apps work just like they sound. You use the app to make a purchase now and pay for it in installments — rather than all at once — without having to take out a traditional personal loan. They’re commonly used for online purchases, but some brick-and-mortar retailers allow the option as well.

A common payment schedule for a buy-now, pay-later service is four equal payments over six weeks. You make your first payment at checkout or when your order ships, and then one payment every two weeks after that. At the end of six weeks, you make your last payment and your purchase is paid for in full.

Some apps offer longer-term financing options for larger purchases. Terms vary, but generally range from three to 36 months.

Benefits of using buy-now, pay-later apps

If you need to make a purchase that just can’t wait, there are some advantages to using a buy-now, pay-later app.

  • Real time decision — You’ll find out at checkout if you’re approved to use the app to make a purchase — no need to wait for a lending decision.
  • No interest, in many cases — With a number of these apps, like Afterpay and Quadpay, you won’t pay interest on your purchase.
  • Credit check not necessarily required — The hard credit checks that some lenders do when you apply for a loan can ding your credit scores. But some buy-now, pay-later apps don’t check your credit at all, and others use a soft credit check that won’t affect your credit scores.
  • Rewards and promotional offers — Some apps have rewards programs and offer special discounts on items you purchase using the app.

Drawbacks of using buy-now, pay-later apps

An app that loans money with no interest may seem like a no-brainer if you’re in a pinch, but there are a few things to watch out for.

  • Short repayment timeline — If you want to avoid paying interest when using these apps, you typically need to pay for the entire purchase within six weeks, which might be tough for large purchases.
  • High interest rates — Some apps, like Affirm and Klarna, offer longer repayment terms — but it may cost you. These payment options charge interest, and rates for longer-term financing can be higher than the average annual percentage rate, or APR, for credit cards or personal loans.
  • Fees — If you make a late payment or it gets returned, you could be charged a fee.
  • Might negatively affect your credit — Some apps report late or missed payments to the credit bureaus, which could negatively affect your credit scores. According to a Credit Karma/Qualtrics survey, 72% of respondents who missed a payment while using a buy-now, pay-later app experienced a drop in their credit scores.

Potential alternatives to using a buy-now, pay-later app

If you think you’ll need longer-term financing, here are some other options to consider.

  • Small personal loan — A small personal loan may offer longer and more-flexible repayment terms than buy-now, pay-later apps. The average interest rate on a 24-month personal loan was 9.46% in the first quarter of 2021, according to the Federal Reserve. That’s lower than Klarna’s flat rate of 19.99%, and the upper end of Affirm’s 0% to 30% APR range. If you can qualify for a lower rate on a personal loan, it might be a better option.
  • Credit card — A credit card with a low or 0% introductory APR is another alternative to consider. If you can pay the balance in full before the promotional period ends, you’ll avoid paying interest altogether. But keep in mind that opening a new account will generate a hard credit inquiry, which may lower your credit scores by a few points.

Ultimately, whether a buy-now, pay-later app is right for you depends on whether you can take advantage of interest-free payments and pay off your balance within a month or so. If you need more time to pay off your purchase, you may want to go another route that charges a lower interest rate.

About the author: Penny is Credit Karma’s conversation maven. If you’re a Credit Karma member and have had a question about your financial situation, you might have chatted with Penny about it in the Credit Karma app. Now, Penny wants… Read more.