Buy Now, Pay Later vs. Layaway

Shoppers have several ways of purchasing without immediately impacting their pocketbooks, whether online or in a retail store. You've probably already heard of two of these options: buy now, pay later, and the layaway option:

• Buy now, pay later is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. By now, it has become a familiar way to pay: An estimated 60% of Americans have used a BNPL service at least once, according to a survey by C+R Research.
• Layaway may be less familiar. With layaway, you make a down payment on an item, which the store holds for you while you pay the remainder of the price in installments. Once you've paid all the installments, you can take the item. A layaway plan ensures that you will get your chosen merchandise when you've fully paid for it.

In this article, we highlight some of the key differences between these two financing options, some of the pros and cons of each, and define which is the better choice for consumers.

How Buy Now, Pay Later Works

Buy now, pay later is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. Also referred to as point-of-sale installment loans, BNPL arrangements are an increasingly popular payment option, especially when shopping online.

When using BNPL to purchase, they agree to take out a short-term loan. These point-of-sale installment loans are offered by a variety of platforms, including:

• Affirm
• Afterpay
• Klarna
• PayPal
• Sezzle
• Zip

These loans generally require shoppers to make an initial payment at purchase, then pay the remaining balance off in three or more installments. Many BNPL services charge no interest on these loans. They often don't require a hard credit check (or in some cases, any credit check at all) to qualify.

Point-of-sale installment loans are used to make relatively small purchases but can add up over time. The average consumer with outstanding buy now, pay later debt owes $883 and makes payments toward four purchases. In terms of credit limits, and how much it's possible to spend using a point-of-sale installment loan, that's typically determined by the store and the buy now, pay later platform.

Before you decide to use any buy now, pay later service, check the fine print on late payments, late fees, and credit reporting to see what the consequences could be if you fall behind.

How Layaway Works

Layaway is a payment plan stores can offer to shoppers. It became commonplace during the Great Depression and remained popular until the mid-1980s. Layaway options died down when credit cards rose to prominence. Some retailers brought layaway options back to their businesses during the Great Recession. Plans vary by retailer but both large and small brand names, including Amazon, have layaway plans.

Most layaway plans work the same way:

• You choose which items you want to purchase.
• You pay a deposit against the total cost of those items
• You make payments over a certain period against the balance due
• You receive the items you purchased once the final payment is made

Stores that offer layaway plans may charge a fee to use them, though you typically won't pay any interest since this is not a loan. That's because shoppers aren't borrowing money to use layaway. Instead, they make payments on items the store is holding for them.

Although layaway is commonly used in retail stores, it is possible to make a layaway purchase online. Merchants make debits that are scheduled at regular intervals from the ordering customer's checking account. Items remain at the retailer's distribution center until the final payment is made, after which the item is sent to the consumer.

Advantages and Disadvantages of Buy Now, Pay Later

Buy now, pay later can offer both advantages and disadvantages to shoppers. We've listed some of the most common ones below.

Advantages

These plans may not require any interest payments at all. That's a plus compared to shopping with a credit card that likely has a double-digit annual percentage rate (APR).

Point-of-sale installment loans may also be available to consumers who don't qualify for credit cards or other loans based on their credit history or lack of one. Afterpay, for example, doesn't require a credit check to qualify.

Disadvantages

Buy now, pay later arrangements could negatively affect your credit if a point-of-sale installment loan goes unpaid. A BNPL platform can report delinquent accounts to the credit bureaus or transfer unpaid accounts to a debt collector.

There's also the potential to overspend. According to a 2020 C+R Research survey, 57% of BNPL users said they regretted making a purchase using a point-of-sale installment loan because the item was too expensive. Overall, 66% of buy now, pay later users say it's a risky way to pay.

And though the number of retailers that accept BNPL is growing, not all stores have signed on. So you may not be able to use it at all, depending on where you shop.

Advantages and Disadvantages of Layaway Plans

Advantages

Like buy now, pay later, layaway may not require a credit check, making it a practical option for some consumers. But unlike BNPL, which often breaks payments into four installments that are due in a relatively short time frame, layaway plans may offer you more time to pay for your purchases. For instance, you might have two to three months (or longer) to pay the entire balance.

What's more, a layaway plan won't damage your credit score if you're unable to make the payments. Instead, you can cancel the plan and, depending on the store, often have your deposit and previous payments refunded to you—though a cancellation fee may apply.

Disadvantages

There are some caveats to keep in mind, however:

• When you use layaway, you can only take the merchandise once you've paid the entire balance
• You may also be required to spend a minimum amount to use layaway
• Certain items may be excluded from layaway purchases
• Layaway plans may only be available for purchases made in stores, not online

Buy Now, Pay Later vs. Layaway: Which Is Better?

BNPL agreements and layaway plans allow shoppers time to pay for purchases, often free of interest charges. In terms of which one is better, the answer can depend on:

• When you want or need the items you're purchasing
• How much time is required to pay them off

With a BNPL plan, you get the items right away. You'll typically need to make your first payment toward the plan as a deposit, but there's no waiting period to get the merchandise as there is with a layaway plan.

On the other hand, a layaway plan can give you more time to pay than a BNPL loan can. So which is better may ultimately depend on the timing and your reasons for purchasing in the first place.

The Bottom Line

Buy now, pay later and layaway plans each have pros and cons for shoppers, but both can be affordable ways to pay. However, if you have good credit and would like to earn some of what you spend back in the form of miles, points, or cash, you might want to consider a rewards credit card instead.