What is “buy now, pay later”?

“Buy now, pay later” is a credit-based payment method that enables consumers to pay the invoices for their purchases in instalments and/or later on. Legally, this includes loans, instalment purchases, deferral agreements and other types of financing assistance for a fee or free of charge, e.g. “zero percent financing”. “Buy now, pay later” is usually offered by specialised payment service providers who work together with the online shops where consumers purchase their goods. The payment is thus generally processed by third parties and not by the sellers themselves.

Unlike the traditional payment methods of “purchase on account” and “purchase in instalments”, “buy now, pay later” allows buyers to divide invoice amounts that are smaller than usual into several instalments without having to apply for a loan. 

How does “buy now, pay later” work?

When paying for their purchase in the online shop, consumers can generally choose whether they want to use the “buy now, pay later” function. After just a few clicks, the purchase is complete, and the invoice amount is automatically collected in instalments and/or at a later date.

• Invoice model: the amount is debited from the account 14 or 30 days after purchase. It is usually also possible to pay the amount earlier.
• Instalment payment model: the amount is debited from the account in instalments over a period of up to 48 months. For this purpose, a loan agreement is concluded with the payment service provider – not with the seller of the goods. Where payments are made in instalments, interest is usually charged. The amount of interest can vary depending on the payment service provider.

Do consumer protection regulations apply to “buy now, pay later”?

Special consumer protection rules generally apply to credit-based payment methods.

Some financing options involving “buy now, pay later” are exempt from the applicable loan regulations, however. This is the case in particular with amounts under EUR 200 or where the loan or the cash price is payable in full within three months.

In particular, the otherwise mandatory credit check of the person using the payment method is not required in these cases. What may sound like an advantage is, in fact, a disadvantage: the consumers who use such credit-based payment methods when money is already tight are left alone with judging whether or not they can afford the purchase. What is more, if there is no obligation to perform a credit check, there can be no sanctions for a violation of such an obligation – sanctions designed to protect the consumer against high interest charges and over-indebtedness.

It is important to note that the EU Consumer Credit Directive has been revised by European lawmakers to better protect consumers from over-indebtedness. The regulations still have to be transposed into the national law of the EU member states and will apply in Germany from the end of 2026 at the latest. The consumer protection regulations will then also apply to small loans of less than EUR 200, overdrafts, free-of-charge loans and short-term loans with low costs.

What should I watch out for before buying?

• “Buy now, pay later” finance schemes are loans

Remember that with “buy now, pay later” financing (instalment payment model) you are buying something on credit. This means that when you accept such an offer, you are taking on debt that you will have to pay back.

• Live within your means

Keep an eye on your bank balance, your monthly fixed costs and other regular expenses. This will help you understand how much money you have available and how much you can spend on your purchases.

• Always be aware of the total amount

Don’t be deceived by low instalment amounts. Instead, look at the total amount you will have to pay in the end, i.e. the cash price of the goods plus financing and other costs. The important thing is to regularly check the state of your finances, taking into account all outstanding instalments – including those from any other consumer loans. Remember that many small purchases can also add up to a mountain of debt. Our advice: if at all possible, avoid taking out several loans at the same time.

• Avoid interest and fees

Consider carefully whether you want to use the “buy now, pay later” financing option for your purchase, as you may be charged interest and fees. It is possible that the (online) shop also offers a different payment method.

• Compare financing offers

If you intend to use a “buy now, pay later” option, first compare it with other financing offers. You can compare the annual percentage rate (APR), which all providers are required to calculate by the same formula, and the financing term. Many banks offer consumer loans at conditions that are often considerably less expensive than the payment options offered by retail stores or online shops.

• Make payments by the due date

Interest for late payments, reminder fees and collection costs can be high. Try to avoid these by making payments on time. It may be helpful to jot down income, expenses and due dates in an (electronic) budget planner. Free budget planner templates are available on consumer centre websites, among other places. You can also set yourself a reminder to ensure you always know when the next instalment is due. One way to do this is with the reminder function on your mobile phone. In addition, make sure that your account has sufficient funds whenever an instalment is about to be debited.

• Be wary of additional products

Be cautious when the credit-based payment methods offered include financing options that go beyond your current needs, such as a credit card. If you still want to use the card, thoroughly familiarise yourself with the terms of use, interest rates and costs before signing up, and keep the above tips in mind when making future purchases.

BaFin/Annika Frank