How Does Afterpay Work? | YNAB

AfterPay, Apple Pay Later, Sezzle, Zip, Klarna, Affirm, Paypal’s Pay in 4…the list of companies advertising four easy, no-interest payments continues to grow. But how does Afterpay work? And could these offers be too good to be true? 

It certainly adds another layer of temptation to those late night sessions of scrolling and shopping (and is actually accepted in-store in some cases now). My middle-of-the-day, works-hard-for-her-money self knows we don’t need (and can’t afford) a $600 hairdryer, but my middle-of-the-night, treat-yourself self feels like four easy payments of $150 is actually very reasonable. An investment in looking good, if you will. Forget the very real fact that I don’t even like doing my hair…this could change everything.

And that’s why the psychology of money can get tricky. Finances and feelings are a power couple prone to toxicity and our slippery brains are more creative than common core math when it comes to justifying purchases. 

So, let’s dive into the world of possibilities (both good and bad) when it comes to easy pay offers, before we end up with a buy now, pay later yard army of wacky inflatable tube men. (Did you know you can get a set of eight for $270 or four easy payments of $67.50? What a deal!) 

How Does Afterpay Work? 

Afterpay, Klarna, Affirm, Sezzle, Zip, Paypal’s Pay in 4, and Apple Pay Later are all Buy Now  Pay Later (BNPL) platforms, which is a newer form of consumer credit that’s growing in popularity. 

Although the terms and conditions vary between lenders, BNPL services break a purchase total into smaller equal installments due on a bi-weekly or monthly basis. They generally advertise no upfront credit checks (or a soft credit pull, which won’t affect credit scores) and most don’t charge interest. 

It’s a lot like an old school layaway plan, except you get the item with the first payment instead of the last. 

How Does Afterpay Make Money? 

So, how do Buy Now Pay Later services like Afterpay make money? Well, they’re not lending out free money to largely unvetted buyers out of the kindness of their heart. (Although I’m sure they really do want you to have that $600 hairdryer or those wacky inflatable tube men.) 

Although there are late fees for missed payments, BNPL providers make the majority of their money via fees from the retailers, who pay between 4 and 9.5% to use these payment platforms. 

And why would merchants pay that, when credit cards like Visa and Mastercard usually charge between 2 and 4%? Because four easy, no-interest payments of $67.50 will always be easier to justify than one payment of $270, which results in shoppers being willing to spend more than they normally would at checkout. 

What If the Payments Are Not-So-Easy? 

There was a hamburger-loving character named Wimpy in the old Popeye cartoons who would say, “I’ll gladly pay you Tuesday for a hamburger today,” but Wimpy didn’t have the money for a hamburger today and wouldn’t on Tuesday either. Easy payment plan options like Afterpay would have had Wimpy in a mountain of hamburger debt—and then what? 

The real problem with BNPL platforms is that they do feel so easy. A $100 item? What’s $25 a month, especially if the payments are interest-free? But if it becomes a habit, it could turn into a lot of different $25 payments per month. BNPL payment options enable you to buy things that you don’t have the money for and your sneaky “I want that now” brain is going to have the utmost confidence in the security of your financial future and in your ability to stay organized and disciplined about these purchases and due dates. 

Credit Karma published a survey of 1,044 users that revealed that 44% of respondents had used a BNPL payment method, and of those users 34% fell behind on making one or more payments. 72% of those who made late payments believe their credit score decreased as a result. 

Although the majority of BNPL services don’t report accounts to credit bureaus, a situation which may change in the future, most BNPL services will send accounts in default to third party collection agencies, which can negatively impact your credit score—and lead to persistent debt collection attempts that will make you regret those four “easy” payments. 

But I Still Want to Buy the Thing

Luckily, we have a risk-free solution for wanting something you can’t afford right now. We call it BeforePay:

(Some people call it saving or budgeting, but let’s face it, that lacks pizzazz.) 

You can still make easy no-interest payments but on whatever payment schedule you want. Here’s how you can activate a similar feature in your YNAB budget: 

Step 1: Create a wish farm. 

Make a list of what you want and start saving in small monthly increments in YNAB.

Step 2: Set a savings target and assign money to that category. 

Create a savings target to hit your goal.

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Step 3: Buy whatever you want once your target is fully funded. One and done at time of purchase. Free and clear. 

(I don’t have a picture of this part because my goals are not fully funded. And because I’ll talk myself out of that hairdryer before then anyway.) 

With Apple jumping into the Buy Now Pay Later game, and plans in place for BNPL platforms to issue actual cards that work like a debit card (but not!), installment plans are going to continue to grow in popularity. 

Proceed with caution. Buy what you can afford. While tempting, delaying payments is a way of stealing from your future. Make a budget, plan where you want your money to go, and enjoy the freedom that comes with fewer payments. 

Curious about budgeting and want to see how it works? Try a free 34-day trial and see how organizing your personal finances can change your life.