Afterpay lets you pay for clothing in installments—but is it worth going into debt for?

I first heard about Afterpay after surviving another holiday season with my family. I was doing a little retail therapy at ColourPop Cosmetics when I saw it underneath the spot where my credit card information was supposed to go: "Installments by Afterpay." My cart wasn’t filled with much, just some funky liquid matte lipstick and one eyeshadow palette that I’ve since gifted to my 3-year-old niece to play with, since the powder was too chalky to blend well. The order came to a whopping $51.31. Still, when I clicked on the Afterpay option, my mind started racing.

What is Afterpay?

If I went with Afterpay—the digital payment platform that allows shoppers to split purchases as low as $35 into four interest-free installments—I’d only have to put down 25%, or $12.83, that day. There'd be three additional installments of $12.83 to come every two weeks after I checked out. Best of all, everything in my cart would be sent to me right away, same as if I’d paid the full purchase price for it all. As a then-freelance writer and stereotypical debt-riddled millennial in constant need of extra cash, the offer intrigued me. And the thought of still having the $38.48 I’d intended to spend that day in my checking account was especially tempting.

I considered it for a brief moment, and then I went for it. Sure, it was impulsive. But it’s just under $13 every other week, a little voice in the back of my head pointed out. You spend more than that in a week on coffee, jeesh. Live a little.

Besides, I reasoned, what was the worst that could happen?

How does Afterpay work?

Afterpay offers a chance to buy products now but pay for them later. Founded in 2015 in Sydney, Australia, the service allows you to break up payments into four equal installments—each amounting to 25% of your total purchase—over six weeks. “Afterpay allows customers to make purchases on their terms,” says Nicole Reyhle, founder and publisher of Retail Minded. “It’s changed the ecosystem of how customers actually shop.”

Is Afterpay good for your wallet?

One way that Afterpay is changing the game for shoppers? By helping them buy from retailers that might ordinarily be too expensive. Afterpay gives its users the means to shop at places they love and get things they’re genuinely excited about, all while helping them technically stay within a budget. The service—which the company insists is a budgeting tool and not a loan or credit card—has also been compared to layaway, that old-fashioned system you might remember in which shoppers put products on hold and pay for them over several installments. Unlike layaway, Afterpay allows customers to get their products immediately, so instant gratification is at work here to make it seem even more attractive.

“With Afterpay, you don't have to come up with the money all at once, so big-ticket items may not be out of reach,” says Adele Alligood, financial advisor and founder of EndThrive.

Is Afterpay legit?

To use Afterpay, your order needs to be more than $35, plus you have to be over 18 and have a debit card or credit card to qualify. You’ll also need to make a free account online or via its app if you’re using it in stores, and provide your payment information along with your phone number and email.

Does Afterpay affect credit?

Got a low or nonexistent credit score? Not a problem, says Afterpay. In an email interview, Nick Molnar, CEO and co-founder of Afterpay, said the company doesn’t perform credit checks and decides within seconds if someone is approved or not, so you’ll know right away if you can use the service as a form of payment. New users have a spending cap of $400 to $500, but they’re able to order from multiple retailers until they reach it. According to Molnar, $2,000 is the total spending limit anyone can have at one time, and that’s only for users with a good repayment history.

All told, Afterpay’s non-credit-based approval process gives it a huge advantage over traditional credit cards, says Jared Weitz, financial services expert and CEO and founder of United Capital Source Inc.—particularly for those who normally wouldn’t get approved for credit.

Is Afterpay safe?

Unlike standard credit cards, Afterpay also doesn’t charge any interest or upfront fees, and you won’t be penalized for reaching your maximum limit—the worst that can happen is you just won’t be able to use it anymore, until you pay off your balances and any fees you might accrue for missing payments (more on that later).

Does Afterpay build credit?

For shoppers with no credit history, Afterpay could seem like a dream come true. But on the flip side, since Afterpay doesn’t talk to credit bureaus, you can’t use it to build up a low or non-existent credit score, either. It’s like credit free fall, and for some folks, that can be a quick way to end up in hot water.

Which stores offer Afterpay?

Afterpay is available at tens of thousands of retailers, but it’s not the only installment plan service out there. Companies like Affirm also partner with retailers of so-called “luxury” goods like clothing and home decor, and help consumers spread out payments over time. However, there are significant differences between the options.

With Afterpay, you’re looking at zero interest and your existing credit score doesn’t matter, while with Affirm and other services like it, you can make installment payments for up to 36 months, with interest ranging from 10% to 30% APR based on your credit score.

“If you’re confident you can make payments under Afterpay’s terms, Afterpay is the better choice [compared to Affirm],” Weitz says. Another distinct edge that Afterpay has over Affirm is its retail partners. While you can use Affirm to shop at certain places like Wayfair and Warby Parker, Afterpay has overwhelmingly cornered the market when it comes to trendy fashion retailers.

In May 2018, the company debuted in the U.S. with Urban Outfitters. Since then, a growing number of popular retailers have partnered with Afterpay, including:

• Anthropologie
• ColourPop
• Dolls Kill
• Forever 21
• Free People
• Kylie Cosmetics
• Nars
• Ray-Ban
• Rebecca Minkoff
• Reformation
• Revolve
• Steve Madden
• Sunglass Hut
• ThirdLove
• True Religion

If you’re sensing a theme with all of these stores, that’s no coincidence. Of the approximately retailers that the company has partnered with, the most popular are those that are also huge with millennials right now. According to Molnar, millennials account for the majority of their users—in the U.S., the average Afterpay user is about 31; in Australia, the average user is 33.

“I think Afterpay’s biggest attribute is that it understands its customers,” Reyhle says.

And the company’s choice of retail partners definitely supports that. By working with retailers that have a significant presence on Instagram and major clout with millennials, Afterpay is able to reach this demographic in a major way. And what are millennials mostly known for (aside from ruining things)?

Debt.

What can go wrong?

Unless you’re shopping a sale, stores like Anthropologie can swallow your whole paycheck if you’re not prudent. Afterpay is an easy solution to fund that next big spree, but that’s exactly why it should be cause for concern, too.

When you use Afterpay as a form of payment, you pay the first installment right away and the rest are charged automatically over the course of the next six weeks.

Seems easy, right? The company even sends out text and email reminders before you’re about to get charged, so nothing comes as a surprise. But a lot can happen over the course of six weeks—job loss, a death in the family, a sudden natural disaster—and circumstances can change, affecting your ability to pay back everything like you agreed.

And if you can’t pay, what then? That’s when the problems start.

“Like any other means of purchasing on credit, if you don’t have the funds to pay for it and neglect to make on-time payments, the fees will begin to rack up,” Weitz says.

While Afterpay doesn’t charge any interest to use the service, it does cost you if you start missing payments. You’ll be charged an extra $8 and your account will get frozen when you fail to make a payment, meaning that you can’t use Afterpay as a payment method for anything new until you settle the bill.

It might not sound that bad, until you factor in that $8 fee will hit your account for each week you fall behind. Although the company caps late fees at 25% of your total purchase price, that can still add up fast.

In Australia, Afterpay has come under fire for its late fee policy. In 2018, late fees accounted for roughly a fifth of its revenue during the first half of the year.

“It’s very easy for consumers to spend more than they can pay back,” says Jim Smith, Australian personal finance expert and blogger at Smithmoney.com. “While Afterpay maintains that the level of consumer defaults is low relative to credit cards, the level of financial stress it can cause is very high.”

Unfortunately, there aren’t a lot of options if you run into trouble repaying your bill, either. Repayment plans aren’t customizable, meaning once you use the service as a payment method, you’re locked into that six-week schedule whether you like it or not.

If you really can’t pay and you’re getting seriously overwhelmed, there is a hardship policy. But its details in the U.S. are vague, as some experts have pointed out, and getting the company to agree to issue it for you might be difficult.

“For hardships, they will either extend your repayment term so you can make smaller payments over a longer period or they will postpone your payments altogether for a certain time,” says Alligood, who’s familiar with Afterpay’s hardship policy in the U.S. and Australia. “Depending on your situation, they will also waive late fees.”

Some situations that might qualify for hardship include recent unemployment or a sudden illness. According to Molnar, while Afterpay doesn’t report to credit agencies directly in the event of late payments, some defaulted accounts have been sent to third-party collection agencies. If that happens, Weitz points out that your credit score and ability to get credit at reasonable interest rates in the future could still be damaged.

Buyer beware, indeed.

Should you use it?

In March 2019, the company reached a major milestone and hit its millionth customer in the U.S. In celebration, they launched “Afterpay Day,” a 48-hour global sale during which users could get discounts at major retailers if they paid using the service.

By June 2019, Afterpay hit 1.5 million customers in the U.S., and also revealed some huge new partnerships, with Levi’s, Ray-Ban, and Tarte Cosmetics key among them. With more than 30,000 retail partners across the world, it’s clear that Afterpay isn’t slowing down any time soon.

But for regular shoppers like you and me, does that mean it’s actually safe or smart to use? Honestly, it totally depends.

“[Afterpay is] ideal for someone who can make payments that fit within their budget,” Alligood says. “There are no unpleasant surprises. You will know exactly how much each payment will cost, and you won't have to worry about hidden fees.”

That said, the risks are apparent, too.

“A service like this is a way to easily spend more than you realize you are, and [Afterpay] is all about consumer goods—things that you want, but don’t necessarily need,” Weitz says.

Part of the appeal of Afterpay for shoppers—especially for millennials who are used to having their checking accounts treated as a punching bag—is that it’s not a credit card. If you want to avoid high interest rates and traditional forms of credit, you can do so with Afterpay. And in that way, it looks like a decent alternative, since you don’t need a good credit score to qualify and you won’t have to pay interest every time you use it.

But take a step back and another truth becomes clear: Afterpay and other buy-now-pay-later services are still designed to put people in debt. Those installment payments can seem low to start, but they’ll creep up if you rack up multiple big orders at once. And unlike debit or credit cards, there’s no reward for paying on time, either, except not getting hit with late fees.

In the end, it’s still a bill you have to pay back. Does that make Afterpay a terrible payment option? No, but it’s all in how you use it—same as any other kind of debt.

“We live in a competitive commerce landscape,” Reyhle says. “It all comes down to responsibility. Afterpay gives customers a sense of control and makes them feel like they’re able to spend their dollars in a way that fits their budget—and it allows them to make purchase decisions unlike they have in the past. It’s for the budget-minded consumer.”

And for most shoppers, that’s really what it comes down to.

For my own part, after my little ColourPop order came in, I kind of forgot that I’d used Afterpay to purchase it. (Hey, it was a busy two weeks.) If it wasn’t for the text and email reminders I received, I probably would have spaced out on it completely. But also, because my cost was so low—again, just $51.31 spread over the course of four installments of under $13—and I had the money anyway, I easily paid the bill and never got hit with one of those late fees.

Overall, my experience was pretty harmless. But I can also see how a service like this could quickly get addictive. Now that I know about Afterpay, it’s like I see it everywhere, and that little voice—the same one that persuaded me to try it out in the first place—creeps up again. You know that Lacey Dress at Reformation really isn’t that expensive with these payments if you think about it, and you could get a lot of use out of it and...

And then I remember that in many ways, I’m exactly the kind of shopper Afterpay is going for: I’m a millennial, I have debt, and I really want to look cute and shop at places like Reformation but I know I can’t really afford it. With Afterpay, part of me feels like I could—and that’s precisely why I don’t trust it. Because of that, I’ll be passing on Afterpay in the future. But if you’re someone who is able to control how much you spend and keep within your means, it could be a decent, interest-free way to take advantage of sales between paychecks or fund your next big shopping spree. Just be careful.

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Prices are accurate at the time this article was published, but may change over time.