How Does Afterpay Work?

If you’re shopping online at a merchant that works with Afterpay, you’ll be presented with the option to use the service at checkout.

I recently noticed an Afterpay offer when I shopped for some furniture. The option to use the service pops up just before you pay — as a last-second surprise.

You can choose Afterpay as your payment method, instantly create an Afterpay account and make your first payment. In most circumstances, you’ll divide the total cost of the item by four.

Your first payment is due instantly. You’ll make three subsequent, equal payments, one every two weeks.

If your item is particularly expensive, Afterpay may require you to pay more than a 25% payment upfront.

Shopping in-store? You’ll need to download the Afterpay app on your smartphone, create an account, tap the “Card” tab and add Afterpay to Apple Pay or Google Pay. Then you can use either mobile wallet app to make a purchase in the store.

My Experience With Afterpay

Afterpay’s website offered the most extensive navigation menu of any of the BNPL companies I reviewed.

It offers menu items such as “Top Deals,” “New & Now” and “Most Popular.” Its “All Categories” menu item had eight sub-categories, and those eight had a combined 34 categories under them.

That may sound hectic, but when you’re trying to sort between thousands of different merchants, you need the menu to be somewhat granular.

To be fair, many people probably shop through an Afterpay partner brand and don’t associate the purchase with the BNPL service until they reach the checkout page.

I didn’t have to download an app or go through a long process to check out with Afterpay. It was the most efficient BNPL shopping I experienced.

The portal also shows me how much I owe, what my open line of credit is with Afterpay and when my next payment is due – without requiring a single click.

Afterpay Fees: What Happens if You Miss a Payment?

In most cases, if you’re financing a purchase through a “buy now, pay later” (BNPL) service and you miss a payment, the company will report it to the credit bureaus.

Afterpay insists it doesn’t ever report missed payments to credit bureaus. However, if you miss a payment, it will hit you with late fees.

Your payments aren’t necessarily automatic. You can check the Afterpay app to keep track of how much you owe and when. You can use a debit card or credit card. You can also set up automated payments.

According to Entrepreneur, Afterpay charges a $10 late fee if you miss a payment. It tacks on an additional $7 fee if you haven’t paid seven days after your initial due date.

However, the company caps late fees at 25% or $68, whichever is less.

It’s great that you won’t get punished on your credit score if you forget to make a payment. That seems to happen often with other BNPL companies. But a potential 25% fee is punishment enough. That sort of fee easily eliminates any benefit you get from an “interest-free” payment plan.

You won’t be charged a penalty if you pay off your account balance early. If you’re late, Afterpay won’t allow you to make any new purchases until you’ve paid in full. It also may decrease or eliminate your future spending limits.

How Does Afterpay Determine Your Spending Limits?

“Our spending limits start at around $500 and only increase gradually,” Afterpay says on its website.

The company doesn’t use soft or hard credit checks. Instead, it tailors its spending limits to each customer by considering:

Time using Afterpay
Value of item being purchased
Current Afterpay account balance
Number of open orders

Afterpay won’t approve every order. The company can choose to deny something that’s too expensive. Individual merchants also can impose spending limits.

You may see an estimated spending limit on the checkout page, where you’ll find the option to finance via Afterpay.

The company may raise your spending limit if you build a history of successfully completing payments.

Frequently Asked Questions About Afterpay

Will Afterpay Affect My Credit?

Afterpay says it does not run hard or soft credit checks on any of its customers. It also says it never reports anyone to a credit bureau for being late on a payment. So using Afterpay should not help or hurt your credit score.

What Companies Partner With Afterpay?

Afterpay works with an enormous number of merchants. The most recent reported count I was able to find was 55,000, but it seems likely the number is higher now.

Some of the most recognizable merchants that work with Afterpay include:

What Happens if I Request a Refund?

The original merchant makes all refund decisions.

If you get a full refund from a merchant for an item you financed via Afterpay, the company will cancel your upcoming payments. Afterpay will also credit your account for any payments you already made.

If you get a partial refund, Afterpay starts with your final payment and works backward. It will cancel payments and then move on to refunds if necessary.

Afterpay Pros

Here are some of the company’s best attributes:

Zero interest on on-time payments. If you’re careful about making your payments, you’ll get an interest-free loan that extends as much as six weeks.
Can benefit efforts to pay off high-interest debt. Six weeks isn’t long. But if you’re getting paid every two weeks or even weekly, and you are paying off high-interest debt (perhaps on a credit card), getting a chance to spread out your payments on a piece of clothing or furniture could be a help.
Orders ship as if you paid in full. There are downsides to this. But let’s face it, being able to walk out of a store or sit on your couch and get a package after paying just 25% for an item is nice.
Doesn’t hurt your credit score. Afterpay’s approach is helpful to people who miss payments, at least from a credit standpoint. It would not be a good feeling to see your credit ruined because you missed a payment installment on a $200 item you bought.
Alternative financing. Afterpay offers an option for those with bad credit, no credit or people who mistrust traditional finance institutions (such as credit card companies).

Afterpay Cons

Here are some of the company’s biggest weaknesses:

Expensive late fees. “Interest-free loan” sounds good. But it’s for just six weeks. You risk paying a fee of as much as 25% for less than two months’ worth of credit.
Can encourage excess spending. With less money required upfront, certain personalities could be coaxed to spend more money than they otherwise would. Or even spending money they don’t have. Don’t be one of those people.
Requires you to be organized. At minimum, you need to set up automated payments so you don’t miss any. Two, four and six weeks go by fast. If you forget about those payments, you’ll be smashed with expensive late fees.
Retailers can require minimum spend amounts. You need both Afterpay and the merchant to approve any purchases you make through the service.
Less regulated industry. It’s easy to be critical of rules and regulations. But in the financial world, they’re often in place to protect the consumer. This is a relatively new version of a type of marketing that has existed for a long time. The lack of regulation thus far puts more responsibility on the consumer to be careful.

Alternatives: Other Buy Now, Pay Later Options

Keep in mind that most “buy now, pay later” options will report you to the credit bureaus if you miss a payment.

So you run a real risk of wrecking your credit by using them unless you’re absolutely sure you’re not going to forget to follow through (or at least immediately set up automated payments).

The risk to your credit score is in addition to owing late fees.

BNPL has become a highly competitive field. Some of Afterpay’s top competitors include:

Google and Goldman Sachs reportedly are partnering to create a BNPL product as well. Apple and Goldman Sachs reportedly are partnering to create a BNPL product as well.

Final Thoughts

The circumstances when it makes sense to use Afterpay are narrow. The personality it takes to avoid incurring late fees, overspending or ruining your credit (in the case of Afterpay competitors) is narrow as well.

After reviewing Afterpay, my takeaway is to proceed with caution. It offers some appreciated guardrails with low starting limits (about $500) and a public commitment not to impact your credit. But it’s almost always going to be better to pay for the item upfront rather than in installments that are all due within six weeks, even if they’re interest-free.

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Afterpay Review: Quick Look

What Is Afterpay?