Skip to Main Content

Buy Now, Pay Later? Why Installment Payment Plans Are Hurting Your Wallet

Go with us: You’re scrolling through Instagram . . . a like here, a save there, and a couple comments here and there. As you’re scrolling, you’re hit by the most beautiful targeted ad for the exact shoes you’ve been wanting. Obviously, you click on the ad and find out that the shoes are a little too pricey—especially this month since you’ve already blown your budget. But wait—there’s a banner at the bottom that says, “Buy now, pay later! Only four easy installment payments of $19.50.”

Four payments of $19.50? Shoot, I can afford that right now! Maybe I should go ahead and buy these beauties.

Stop.

Pump the brakes.

Don’t do anything until you hear us out about the real truth behind these installment payment plans.

What Are Installment Payment Plans?

They’re like digital buy now, pay later setups. A digital installment plan breaks up your bill into smaller chunks or installment payments that you pay over a set amount of time. Think of it as layaway and credit falling in love, getting married, and having a baby—a really ugly baby.

money icon

You can pay off debt faster! Get started with a FREE trial of Ramsey+.

Unfortunately, the use of installment payment plans has skyrocketed. It was up 215% in the first two months of 2021 compared to the year before!1 Over one-third of Americans have used a buy now, pay later service, and most said they used it because they either couldn’t fit the purchase into their budget or they didn’t want to pay interest on a credit card.2 What’s really scary is that people who are using installment payments—because they claim they can’t afford not to—are somehow placing orders that are 18% larger.3 How backward is that?

What Are Some of the Biggest Digital Installment Brands?

If you try to buy something online these days, you might be greeted by one of these heavy hitters in the world of easy payments:

Afterpay 

Afterpay’s tagline is “Shop now. Pay over 6 weeks. Never pay interest.” The service allows the buyer to split the bill into four equal payments, with the first paid up front and the rest billed every two weeks. There’s no minimum purchase required—so yes, technically you could buy something for $1 and split it into four payments of 25 cents—but some stores do require a minimum amount before they’ll offer Afterpay as an option. Afterpay even has an app that allows users to pay in four while shopping in-store.

So, there’s no interest . . . what’s the catch? Late fees. For orders below $40, Afterpay users can face a one-time fee of up to $10 for every late payment, and for orders above $40, late fees can be up to 25% of the order value, capped at $68.4

Affirm

Unlike Afterpay, Affirm offers a variety of ways to pay later—insert their tagline: “Pay at your own pace.”  Once at checkout, customers can choose how they want to split the bill and over how much time—up to 36 months.5 Depending on the store, you may not even have to pay anything up front. But you may have to pay interest. Some of Affirm’s payment options come with up to 30% interest tacked onto the bill.6 Big yikes.

Klarna 

If Afterpay and Affirm got married and had a baby, they’d name it Klarna. And with its bright pink logo and promise that it “makes shopping smooth,” Klarna is like that adorable baby girl who’s got Mom and Dad wrapped around her finger—or rather, millennials and Gen-Z wrapped up in debt.

For the most part, Klarna takes after Afterpay with its popular pay-in-four option. But like Affirm, Klarna also offers other payment plans, including a pay-in-30-day option (nothing due until 30 days is up) and 6–36 month financing that comes with interest at an annual rate up to 19.99%.7,8

Sezzle 

We’ll admit, it’s got a fun name, but that’s the only thing that’s fun about Sezzle. Its slogan is “The way forward,” and on its website, Sezzle claims they “believe that financial freedom can be achieved by all”—which is rich coming from a company that wants you to attach yourself to a ball and chain of debt. But we’ll save that rant for another day.

Similar to Afterpay and Klarna, Sezzle splits orders into four interest-free payments over six weeks and can charge a late fee up to $10. Sezzle also gives you the option of paying a rescheduling convenience fee (up to $5) if customers need a little more wiggle room in between payments—how kind of them!9

Quadpay

Quadpay also boasts the ability to let you split your payment into four interest-free payments over six weeks (déjà vu, anyone?). But there’s something a little extra special about Quadpay, as seen in their slogan: “Buy now. Pay later. Anywhere.” Anywhere? Yep—Quadpay is accepted anywhere that Visa is accepted . . . which is pretty much everywhere. Though they don’t charge any interest, Quadpay does charge a $1 convenience fee for every payment, as well as $7 fees for late payments.10

Uplift 

Uplift is slightly different from the rest in that it’s the buy now, pay later service exclusively for traveling, so its customers are using it to buy things like flights and cruises. We’ll admit, Uplift does have a . . . well . . . uplifting tagline: “We help you get there.” But don’t let that fool you. The only place Uplift is going to help you get to is into debt.

When you buy travel accommodations and check out with Uplift, you can choose from several different payment plans, from three months up to two years. But you’ll be paying extra for this in the long run—Uplift charges up to 36% interest.11 Dang! They also require you spend at least $100—which is easy to do with travel expenses—and less than $25,000. Uh . . . who is racking up that bill when they can’t afford to pay it up front? That’s crazy.

Okay, so even though buy now, pay later is a pretty new way to pay for things, it’s clear that people are already relying on these companies more than they should. Take Afterpay, for example. In the first half of their fiscal year, they made $10.1 billion in sales!12 And what’s worse is that the popularity of installment payment plans seems to be increasing at a time when people are hurting financially. Buy now, pay later services have grown as much as 200% since the COVID-19 pandemic began.13

How Do Installment Payment Plans Work?

So, let’s say you’re browsing online and spot a new shirt on sale at your favorite store. It’s a little expensive and still out of your budget at $70—but because the store uses a buy now, pay later plan, you can have that shirt delivered to your door and only have to pay $17.50 right now.

Oh. But wait. There’s more. (There’s always more.)

Two weeks from now, you’ll owe another $17.50. And another . . . and another—until you pay the balance off. If you’re keeping up with the math here, you’re still paying $70, but it’s broken up into four “easy” payments. But if you miss even one of those payments (oops!), you’ll get hit with a late fee.

For example, if you’re using Afterpay, they’ll slap a $10 fee on the balance you already owe. And every week you don’t pay, they tack on another $10 until the bill is paid (or the fees total up to 25% of the balance). Woof.

While late fees are bad, interest is arguably worse. Take Uplift, for example. Say you spend $1,000 on flight tickets to Mexico and choose to pay it over one year. It’s just $90 a month—so reasonable! Yeah, well, if you look in the tiny fine print on the flight checkout page, you’ll see that the flexible payment option comes with 15% interest on average (or up to 36%). So, by the end of the year, you’ve paid at least $150 extra. Think of all the tacos, burritos and guacamole you could have enjoyed in Mexico with that extra $150 in your pocket. No bueno.

Even if you make your payments on time, the big problem here is that it numbs you to the reality of how much you’re actually spending. Instead of making you feel that sticker shock, installment payments are just feeding your “I want it now” mentality . . . and hiding the real amount of what you’re buying.

What Can You Buy With an Installment Payment Plan?

That shiny new $1,000 iPhone? It could be yours now for just four installments of $250!

How about a $2,500 ticket for a two-week Mediterranean cruise? No need to save up—you’ll definitely feel relaxed on the deck knowing you’ve still got a year’s worth of payments long after your tan fades!

Craving a pint of ice cream? Nothing is sweeter than being able to dig in now and pay later when you grocery shop online!

We hope you caught all of our sarcasm there. Unfortunately, what’s not a joke is that you can buy all of those things with an installment payment plan—and then some. Take a look at the other popular buy now, pay later items:

  • Clothing
  • Concert Tickets
  • Cosmetics
  • Electronics
  • Furniture
  • Groceries
  • Gym Equipment
  • Hotels
  • Flights
  • And More

Do Buy Now, Pay Later Plans Make You Spend More Money?

Let’s just say they definitely don’t make you spend less money.

Remember, these companies want you to believe they aren’t out to make a buck off of you. But hey, if people just so happen to spend more when using their service, well, that’s fine with them. And it’s not a secret. These buy now, pay later businesses are actually pretty proud of helping you blow your budget.

Afterpay says that using their service increases consumer purchases by 20% and increases the average order price by up to 40%.14 Klarna actually promises even more with customers buying 30% more and the average order price going up by 45%.15 And not to be shown up by its buddies in the business, Affirm boasts an 85% increase in upgrades, bundling and add-ons!16 Is your stomach turning now? Yep, ours too.

The numbers don’t lie—people spend more when they use installment payments like these. And it makes sense. If you get to the checkout online and see you can get $125 worth of items and only have to pay $31.25 now, then you might go ahead and add a few more items you had your eye on—why not?

Get this: In an interview with Ben Pressley, executive vice president of sales, operations and strategy of Afterpay, he admitted that “instead of adding three items to a cart, when they use digital installments, they add seven items to their cart. And the basket size changes from $50 to over $100.”17

And Afterpay’s CEO and co-founder Nick Molnar straight up calls Afterpay a “service for millennials that can help them spend responsibly and also help retailers sell more stuff.”18

There you have it. Apparently, if you don’t have enough money to buy what you want, then the “responsible” thing to do is borrow money using an installment payment plan—from a company who’s in this game to help the retailer sell more stuff to you. Why? To get you to rack up more debt so that you’ll come back to buy even more stuff.

Let’s just say it’s no wonder 78% of Americans are living paycheck to paycheck.19 Thanks, Afterpay.

Don’t be fooled by these guys. They aren’t your friends. They don’t want to swoop in and save the day so you can buy that $250 leather jacket that you feel like you deserve. They want to make money off of you. They’re betting on the chance that you won’t be able to make a payment, and they’ll get to cash in on it. If they can lure you in and make you comfortable, then they’ve got you right where they want you—with your guard down and cozied up with more debt.

Installment Payments Are Just Another Form of Debt

Here’s a pro tip: If it walks like debt, talks like debt, and smells like debt—it’s debt. And these companies boasting “easy payments” aren’t any different. They aren’t a smart way to buy things you want, they aren’t more harmless than a credit card, and they aren’t a fancy way to “budget” for a purchase. They’re just wannabe credit cards dressed in shiny clothes, pretending to be your ticket to having it all.

Whatever you do, don’t fall for an installment payment plan—unless you plan to stay broke.

And unlike a credit card where you have to be approved based on credit history, getting approved for most digital installment plans is easy. Too easy. You just need to be 18 years old and have a bank account and a phone number. This “anyone can use it” idea is a sure way to get into trouble—fast.

How to Buy Things the Right Way

Hey, we all want to buy stuff. And sometimes, we actually need to buy things too. The hard reality is that we might not have the money to foot the entire bill at the moment (sorry, instant gratification). But guess what? Using an installment payment plan isn’t the way to do it.

Want to know what really works? A zero-based budget. Not only will you give every single dollar a job to do, but you’ll be able to see where your money is actually going—and do a little course correcting when needed. Oh, you’re spending $100 on coffee this month? Try brewing your coffee at home and cut that spending in half. And look, now you’ve got an extra $50 to go toward that shirt you really wanted.

So, instead of giving your money to Afterpay or Klarna (and taking a chance on missing a payment), use your own money to pay for what you want. No middleman. No hoops to jump through. No feeling like a teenager borrowing money to buy stuff you can’t afford (and Afterpay isn’t your pops).

Sure, saving up for something over time takes willpower—sometimes a lot of willpower. But you can do it! It’s called delayed gratification. And that monthly budget we’re talking about is your key to success.

With a budget, you can save up to buy something using cash. And you’ll know for sure if you can even afford it and not have to rely on using someone else’s money. So, step away from the buy now, pay later schemes and get to know EveryDollar—a budgeting tool that empowers you to give, save, and spend—only available in Ramsey+ . . . no installment payments necessary.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

Get a FREE Customized Plan for Your Money!

Get a FREE Customized Plan for Your Money! 

Answer a few questions, and we'll create a plan tailored just for you. It only takes three minutes!
Take the Assessment

Get a FREE Customized Plan for Your Money! 

Answer a few questions, and we'll create a plan tailored just for you. It only takes three minutes!
Take the Free Assessment