What Is Afterpay? How the Buy-Now-Pay-Later Service Works

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Think of Afterapay as layaway with benefits.

If you remember layaway plans (ask your parents!), you know it’s an old retail custom in which you make installment payments over a period of time to buy a product or service you can’t afford upfront.

But the new generation of buy-now-pay-later services like Afterpay has upped the ante by letting you keep the merchandise immediately after you make the first payment. You pay off the balance in three equal installments, but there’s no more waiting until you hand over that last dollar to get your hands on your purchase.

If you feel like you’re seeing more of these offers in your favorite stores and online, you’re not imagining things (and you probably shop at retailers that cater to a younger demo).

Australia-based Afterpay says it has signed up more than 20 million U.S. customers and works with 100,000-plus global retail partners. Other buy-now-pay-later options include Affirm and Klarna.

For consumers unable or unwilling to use credit cards, these installment services can offer the allure of spreading out payments without the sting of sky-high interest associated with credit card balances.

Choosing installment payments is as simple as a credit card or PayPal option at checkout, but is it worth trying? We’re here to explain how Afterpay works.

What Is Afterpay?

Buy-now-pay-later services like Afterpay are also known as point-of-sale lenders. Buyers select Afterpay at the point of purchase and can get approval immediately without a credit check. Once approved, the buyer makes an initial payment and is enrolled in a six-week payment plan.

The services tout their benefits over a credit card, noting that users don’t pay fees or interest on their purchase.

That’s true, but changing the method shouldn’t change how you perceive the purchase, according to Ariel Ward, Certified Financial Planner at Abacus Wealth Partners.

“If you have a credit card balance and it’s not being paid off every month, I think that’s a moment to pause and see if there’s a different way to get what you need or really evaluate if what you’re trying to buy with Afterpay is something that you truly need,” Ward said.

How Afterpay Works

Afterpay and other installment payment services aren’t lines of credit, so you don’t need the hard credit check like you would with a credit card — but you also don’t get the benefit of adding on-time payments to your credit history.

Afterpay works like this:

1. Set up an Afterpay account either online or via the app. You’ll need to provide the following information:

  • Email
  • Phone number
  • Address
  • Date of birth
  • Debit or credit card information — prepaid cards cannot be used for payment.

2. Choose Afterpay during checkout. You’ll receive notification about your approval in a few seconds (if you have overdue payments, you won’t be able to make a purchase). If you’re buying in a brick-and-mortar, you’ll be billed for the first 25% of your purchase immediately and take the purchase home with you. If you’re buying online, your items will ship when the first payment is processed.

Pro Tip

If you place an online order and you don’t receive it, it’s up to you to resolve the issue with the retailer. Installment payments will continue despite the order not being delivered.

3. The remaining three payments are due every two weeks. You have the option to make payments manually before the due date, send the payment on the due date or set up automatic payment, allowing Afterpay to take the installment from the payment method you have on file. Afterpay will send you a reminder before the payment is due, regardless of which method you choose. If you make multiple purchases, you can track when different payments are due through the Afterpay account dashboard.

What Happens If You Don’t Pay?

If your payment isn’t successfully processed within 10 days of the due date, you’ll get charged a late fee of up to $8 (or up to 25% of the purchase price — whichever is less). You’ll be charged a late fee each time you miss an installment payment.

How Much Can You Spend Using Afterpay?

The maximum amount you can spend using Afterpay depends on a number of factors, including:

  • How long you’ve been using the service (new members have a lower limit)
  • Available funds on the debit or credit card you submit (the more you have, the more you can buy)
  • Your payment history (always on time = more $)

Pros of Afterpay

Afterpay offers one big advantage over carrying a credit card balance: You don’t pay interest while you’re paying off a purchase. So long as you make your installment payments on time and in full, the service is free to use

Additionally, using Afterpay doesn’t require a hard credit check like when you apply for a credit card, which can temporarily ding your credit score.

If it’s free, how does Afterpay make money? The service charges merchants a fee as a percentage of each sale, plus it makes money off the late fees it charges buyers.

So when is using Afterpay a good idea?

Perhaps you find a great deal on an item and you know you’re receiving a large cash amount in the near future — like a bonus — but you won’t receive the money until after the sale ends.

Basically, using Afterpay is helpful when you have the ability to pay the full amount of the product, but the installment payments give you some breathing room in your budget.

Cons of Afterpay

So why shouldn’t you use Afterpay?

Let’s start with this question: Do you carry a credit card balance?

If the answer is “yes,” then although Afterpay might seem like an easy solution for getting that must-have shirt, it’s only providing the illusion that you have money to spend.

And if you have any trouble with making an installment payment, you’ll get hit with a late fee. For a single purchase, that might not seem like much, but if you’re using Afterpay for multiple purchases, that’s a lot of payments to track — and a lot of fees to rack up.

Afterpay states on its site that it meets the requirements created by the Payment Card Industry Security Standards Council — the group that monitors credit card data security.

Additionally, Afterpay isn’t necessarily a reliable source for payments, as you never know exactly how much you can spend on any particular purchase or how many active orders you can have before you’re denied.

And remember how your credit score won’t get dinged for using Afterpay? Well, on the flip side, you won’t reap the credit benefits of using a credit card.

Ward suggested that instead of Afterpay, consider applying for a credit card with a very low limit that also offers a grace period (most issuers do, but check the terms of your agreement).

By charging small amounts that you pay off each month, you’ll enjoy the benefits of the grace period between the time of purchase and your credit card due date.

And by using a credit card, your on-time payments will be reported to the credit bureaus, thus helping you build your credit score, which installment payments can’t do.

Afterpay vs. Credit Card

So is a buy-now-pay-later service like Afterpay better than a traditional credit card? Here’s a side-by-side comparison to help you make the best choice for you:

  Afterpay Credit Card
Accepted By More than 100,000 locations, including Anthropologie, Free People and Ulta Beauty. But you can only use it to pay for retail goods. Major credit cards (like MasterCard and Visa) are accepted almost everywhere, including in foreign countries.
Payment Schedule Pay in four installments, due every two weeks. If you do not carry a balance and your credit card issuer offers a grace period, by law the grace period must last at least 21 days.
How Does It Affect Your Credit Score? Afterpay doesnu2019t do a credit check before you apply, and on-time payments won't improve your credit history. Issuers perform a hard credit check when you apply, which could lower your credit score temporarily. A history of on-time payments can establish your credit history and improve your score. Late payments hurt your score.
Interest Rates Interest-free. If you carry a balance, youu2019ll accrue interest daily. Average credit card interest rate is 14.54%, according to the Federal Reserve.
Late Payment Fee Late fees are either $8 or up to 25% of your initial order value u2014 whichever is less. Credit card issuers can charge a late fee of up to $28 the first time you're late and up to $39 if you've been late on your payment within the past six months.
Minimum Purchase Although Afterpay doesnu2019t specify a minimum purchase amount, stores typically do. Typically, no minimum purchase, although some merchants may require a minimum transaction amount to offset processing fees.
What is the Limit? Individual purchase approval is based on a variety of factors, including your history of on-time payments with Afterpay u2014 newer shoppers will have greater restrictions. If you miss a payment, you wonu2019t be able to make any further purchases. Your credit limit is outlined in your credit card agreement. The average cre30,000, according to Experian.

In the end, whichever you choose, so long as you use the services responsibly — read: you pay off your balance on time every time — you can enjoy the benefits of either.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.