Pay-Over-Time: Worthwhile or Waste?

Pay-Over-Time (also known as Buy Now Pay Later, or BNPL for short) has become popular in recent years. Each purchase is split into smaller chunks so people don’t have to immediately pay the full amount. Consumers are financing everything from pizza deliveries to luxury goods. The industry is already worth billions and expected to continue growing at a rapid pace. Sources generally seem to believe the market will grow 20-30% over the next decade.

But does it make sense to use such services?

In general, no. You should never spend beyond your means. Many people aren’t using credit responsibly, and it’s easy to overspend when even small purchases are financed. The video game concept of “microtransactions” has entered retail. Many BNPL purchases are another form of accumulating consumer debt. The majority of people should treat credit cards as debit cards and ignore pay-over-time services. Don’t purchase things unless you can afford them. The best form of financial responsibility is usually to set a budget and stick by it. BNPL should only be used (1) when absolutely necessary to get through hard times, and (2) with zero fees and zero interest whenever possible.

We do acknowledge that pay-over-time makes sense in certain circumstances. Credit cards have high rates. Interest can be a killer if credit cards aren’t paid off in full each month. If it’s possible to avoid credit card APR and BNPL is a legitimate help for a particular purchase, then BNPL may work out in the end.

Buy Now, Pay Later (from banks)

Pay-Over-Time is offered by companies such as Affirm, Klarna, Sezzle, and Paypal. Some credit cards also offer pay-over-time services, for a small fee, when it comes to purchases of $100 or more. For example, Chase Bank has “My Chase Plan” (although the name is changing to “Chase Pay Over Time” soon) and American Express has “Plan It.” These features don’t accumulate interest at the normal APR associated with a credit account.

For one example purchase of $220 in Spring 2024, AMEX said it’d cost about $2 per month for a three-month plan, with a minimum payment of around $75 on each statement. The card normally has a 26% APR (approximate; variable). AMEX does have occasional offers for reduced fees/APRs, such as 10% APR for 6 months, or waiving Plan It fees for a limited time. But in this case, if you didn’t use Plan It, a $220 purchase would cost close to $230 when including the 26% APR. The total interest is about $9.60 over 3 months. So if you pay $6 with Plan It (~2.73% of the total purchase price), the effective APR is reduced by about a third. It’s still a fairly high rate though (over 10%) and you’re making big trade-offs in the long term by paying fees. Any credit card rewards earned will be outweighed by fees.

Chase Bank says (as of Spring 2024) that “The Chase Pay Over Time Fee for plans set up after purchase is 1.72% of the amount of each eligible purchase transaction or amount selected to create a Pay Over Time plan.” Numbers are approximate. Details can vary depending on the type/amount of purchase and other factors.

Some example plans:

A $520 purchase can be split into 6 payments ($90.92/month payment and $4.25/month fee) or 12 payments ($47.91/month payment and $4.57/month fee) or even 18 months. The card normally has a 26% APR (approximate; variable). If you didn’t use My Chase Plan, your total fees over a 6-month period would be about $40 in interest. Chase’s pay-over-time feature would instead accumulate $25.50 in fees for the 6-month plan. Over 12 months, it’d be about $76 in interest (26% APR, about 15% of the purchase price) versus $54.84 in My Chase Plan fees (0.88% of the price per month, totaling 10.55% of the purchase price after a year).

A $540.79 purchase can be split into 6 payments ($94.56/month payment and $4.42/month fee) or 12 payments ($49.82/month payment and $4.75/month fee) or 18 months. A $112.66 purchase can be split into 3 payments ($38.47/month payment and $0.91/month fee) or 6 payments ($19.71/month payment and $0.93/month fee) or 12 months ($10.39/month payment and $1.00/month fee)

The Chase Amazon Prime card, in addition to My Chase Plan, has its own BNPL feature. Purchases on Amazon are eligible either for 5% cash back or 0% APR for a select period of time (variable) at checkout. You can have a promotional 0% APR on purchases of $50 or more: 6 months for $50+, 12 months for $250+, or 18 months for $500+. But since no rewards are earned on these purchases, it’s effectively a 5% fee, and therefore better to go with the cash back rate whenever possible.

Citi Flex Pay works like My Chase Plan, except on eligible purchases of at least $50-75 instead of $100 or more. The bank mentions “It’s already a feature on your Citi card—No application or credit check required.” Citi also sends customers occasional APR offers via email, such as 3.99% on all purchases for six months instead of the standard rate (often around 26%).

Bank Flex Loans

For people who have credit cards with Chase or Citi, customers have the ability to borrow cash from their credit limit at a lower APR than their credit card APR. (Other banks may also offer this feature. These are just the two examples we’re most familiar with.)

“My Chase Loan” is a pre-approved no-credit-check loan that lets you borrow a percentage of a card’s credit limit. For example, a Chase Sapphire Reserve with a limit of $20,000 can borrow loan amounts of $500 to about $19,000 (subject to how much credit is currently in use but not 100% of credit). Depending on the length of the loan you want (from 6 months to 36 months) the APR ranges from around 8% to 12%. For example, a loan of $10,000 can be paid over 6 billing cycles at 7.99% APR, with a monthly payment of $1,704.44; or paid over 24 billing cycles at 10.49% APR with a monthly payment of $463.48. Payments are added to your monthly credit card bill as if it was a regular purchase. The loan is deposited into a bank account of your choice as cash (and it doesn’t have to go into a Chase checking account). Paying interest is always undesirable, but this option has the potential to be better than bank loans or BNPL services. It can be an emergency option.

Citi Flex Loan is basically the same as Chase. One Citi email described it as “access funds with a loan from your existing credit line” with a fixed APR. Citi does offer personal loans but that’s something different (APR as low as 12% in one example). Flex Loans use the existing credit limit of a credit card you already have, without applications or credit checks. For example, with a Citi card that has a limit of $10,500, you can borrow between $500 and $10,500 as cash, at an APR of 8.99%. Payments are split into 12, 24, 36, 48, or 60 installments. In another example Citi card with a slightly lower limit, the APR varied from 8.99% to 10.99% depending on the length of the Flex Loan.

Since these “loans” effectively count as a large purchase instead of an official bank loan, there isn’t any credit check. Your card utilization rate temporarily goes up, which may affect your credit score, but otherwise there isn’t any credit score impact. This option can be superior to pay-over-time, depending on personal needs and the situation at hand.

Buy Now, Pay Later (non-banks)

Most of the Buy Now, Pay Later (BNPL) companies have similar or identical terms. Which one you’d use depends on personal preferences and where you’re shopping. Some services aren’t available in every state.

Here are three examples from among the larger BNPL companies:

Affirm payments are interest-free for approximately two-month terms (four payments total, made every two weeks). Longer terms (up to 60 months) have interest ranging from 0% to 36% and vary depending on store/purchase. In one example, they say a $500 purchase at 15% APR will accumulate $41.55 in interest over 12 months and you’d pay $45.13 per month total. Affirm services may impact your credit if you decide to use them. Affirm says they report “some” activity to Experian, and they usually don’t report any loans after your first one (unless the customer falls behind on payments). Their “4 interest-free payment plans” don’t impact customer credit if paid on time. Other options may impact credit scores.

Klarna is similar. During checkout, customers can pay in full or “Pay in 4 interest-free payments, Pay in 30 days, or Pay over time.” Exact rates vary. For Klarna’s “Pay in 4” feature, it doesn’t impact credit scores. They don’t run a hard inquiry and don’t report your payments to credit bureaus for this. Other options, however, may impact credit scores.

PayPal offers the ability to “Split purchases between $30-$1500 into 4 interest-free, bi-weekly payments.” It’ll be 4 payments over 6 weeks, and you pay the first installment at checkout. For other payment plans (purchases up to $10,000) they can be split into 6, 12, or 24 monthly payments, with APRs ranging from 10% to 36%. The company says “When applying for PayPal Pay Later, a soft credit check may be needed, but will not affect your credit score.” (This would be for Pay in 4 only; if APR applies, then a hard inquiry is likely necessary.)

Concluding Thoughts

In conclusion, if someone is going to use pay-over-time services, use short terms to keep the payments interest-free and fee-free. BNPL should be used sparingly, if at all. The best method of BNPL will depend on individual circumstances—sometimes it’s an added benefit on credit cards, and sometimes alternative routes are better. Only you can know what’s best for you. There are lots of options for getting immediate access to interest-free capital, including using 0% APR credit cards and no-fee/low-fee balance transfers.

In general: Buy Now, Pay Later (BNPL) is better than incurring interest from credit card APRs. It’s not quite a scam; it can be helpful when done properly. However, other options may be even better, depending on your personal situation.