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How Does Afterpay Really Work?

To know me is to know that I love two very important things: shopping and pizza. So as I’ve been watching trends come and go in the online shopping world, there’s one in particular that’s been bothering me: Afterpay.

You guys, this new purchasing tool is like this generation’s version of layaway (putting a gift on hold at the store and making payments on it). And if our parents would tell us to steer clear of using buy now, pay later options then, we should steer clear of using them now.

So, before you’re tempted to buy those jeans (and pay for them later), let me answer a few of your burning questions like:

  • What is Afterpay?
  • How does Afterpay work?
  • Who uses Afterpay?

What Is Afterpay?

Afterpay is a buy now, pay later lender that divides your total purchase amount into four biweekly payments. If a retailer uses Afterpay, you can leave the store with your item or order it online after putting down just 25% of the total price.

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Afterpay first launched in Australia in 2014 and came over to the U.S. in 2018.1 The company has only been around for six years and is already valued at over $40 billion.2 This year, Afterpay’s co-founder and CEO, Nick Molnar, has reached a net worth of 1.9 billion.3 You could say they’ve figured out how to market themselves well “helping” more people get the things they want—right now.

But, you guys, don’t be fooled. What Afterpay actually “helps” you do is go into debt for a lifestyle you can’t really afford.

How Does Afterpay Work?

Just like most buy now, pay later payment plans, Afterpay wants to “help” you get what you want—without the wait. You might be thinking, Wow, it sounds like they really care about what I want!

Not so fast. They’re the toxic mean girl who says, “Get in loser, we’re going shopping!” And instead of reminding you that you don’t have the money right now for a new jacket, they enable you to get it anyway . . . potentially pushing you into further into debt.

What a nice “friend”!

Here’s how it works: You’re harmlessly scrolling the new arrivals section of your favorite online boutique when you see a jacket that stops you in your tracks. You squint your eyes as you peek at the price, remembering that you’ve already spent most of your fun money for the month. But then you see a banner at the bottom of the listing that says, “Yours for just four payments of $19.99.” You can’t afford $79.96, but you can afford $19.99.

Sneaky, right? Of course, it’s tempting to buy that jacket—because four payments of $19.99 feels like less money than $79.

Plain and simple: You’re going to spend more money by using Afterpay—especially if you’re late on a payment.

How Does Afterpay Make Money?

Since Afterpay doesn’t charge a crazy amount of interest on your purchases like a credit card would, how do they make money? Great question.

In addition to late fees, Afterpay makes money through their retail partnerships. Currently, they work with over 85,000 brands and have “helped” 16 million customers use their service to “get what they want when they want it.”4,5

When you make a purchase, Afterpay gives you six weeks to pay it off, with payments being made every two weeks. And if you’re late on a payment, they charge an additional $10 on top of what you owe. One week later, that’s followed up with another $7 fee and continues every week until one of two things happens: the balance is paid or the fees total either $68 or 25% of the loan’s value (whichever is less).5  If your purchase is less than $40, your late fee will be a max of $10. And while that may not sound too bad, any late fee you have to pay is money you can’t get back.6

It’s safe to say we know how they make money.

Who Uses Afterpay?

Afterpay has been marketed as the better alternative to credit cards, letting potential customers believe that they can get what they need without having to pay interest.

That message seems to be working, because 73% of their customer base is made up of millennials and Gen Z.7 And with online shopping more relevant than ever during (and after) the pandemic, a study by C+R Research found that 71% of people surveyed have been making more purchases online since the pandemic. Sixty percent of those people have used a buy now, pay later service, 46% are currently making payments through one of those services, and 66% believe it’s risky to use those services.8

So why are people choosing to use services like Afterpay? C+R Research participants said that it’s easier to make payments, it’s more flexible than credit cards, they don’t have to pay interest, and the approval process is easier.9 

You guys, those are not good enough reasons to buy something you can’t afford now just for a little retail therapy. Believe me—it won’t make you feel better in the long run . . . especially if you have to make late payments.

Is Afterpay Worth It?

Nope. Not even a little bit.

I’m not opposed to spending money—in fact, I’m a spender at heart. But I want you to spend your money wisely. One of the best ways to do that is by budgeting.

When you do a zero-based budget every single month, you’ll start to recognize how much more freeing it is to spend money when you actually know where it’s going. Not only will you have planned for something you want, you’ll be able to spend that money you set aside guilt-free and worry-free. And if you don’t have a favorite budgeting tool, try mine. EveryDollar is an app that allows you to create your zero-based budget for free. You can download EveryDollar right here.

That’s why buy now, pay later services like Afterpay are not worth it. You might think it’s a good deal because the total price is broken up into smaller payments—but that’s the problem. You may forget to pay off your purchase or you may even end up spending more because you were tricked into thinking you “got a deal.”

You might think it’s easy enough to avoid the late fees. Just pay on time, right? The problem is, a lot of people—hardworking, everyday people—don’t make their payments on time. In fact, Ramsey Solutions just found that “forty percent (40%) of millennials who have a credit card have maxed one out in the last month, and half of millennials with debt have at least one in collections.”10

So, even if you really think you’ve got a handle on the amount of money you’re spending, there’s a good chance the late fees will get you. And those fees steal more than your paycheck—they steal your joy too.

The Best Way to Pay for Your Purchases

I enjoy spending money. I can out-shop just about anyone. But I don’t need Afterpay to do it, and guess what—neither do you! You can still break the cost up into four parts if you need to: Put $20 into your budget each month, and in four months, you’ll have saved up for that jacket.

Bottom line? Don’t buy the jacket unless you can afford it then and there. Don’t Afterpay for it. Actually pay for it.

Make a plan for your money and use cash so you aren’t racking up payments every time you want to buy something. Use common sense and don’t spend money you don’t have! People who stick to this philosophy win with money.

If you want to find extra money in your bank account, take my free 14-Day Money Finder here! Then you’ll have no excuse to use Afterpay because you’ll have the cash to pay in full. So, what are you waiting for? Start saving and kick Afterpay to the curb for good.

Rachel Cruze

About the author

Rachel Cruze

Rachel Cruze is a two-time #1 national bestselling author, financial expert and host of The Rachel Cruze Show. She has appeared on Good Morning America, Today and Live With Kelly & Ryan, among others. Since 2010, Rachel has served at Ramsey Solutions, where she teaches people how to avoid debt, save money, budget and win with money at any stage in life. Learn More.

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