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What is Afterpay and How Does it Work?

By Kyle Kapper

Updated Sep 29, 2023

What is Afterpay

    Online shopping has grown in popularity over the past few years, peaking during the pandemic and gaining ground steadily after that.

    But with less economic flexibility affecting more and more online shoppers today, the online shopping space has been compelled to innovate. So, around 2019, a spike in buy now pay later services was also observed. 

    The Afterpay mobile app was among the few BNPL services leading the way.

    What is a Buy Now, Pay Later Payment Plan?

    So, what exactly is a buy now, pay later payment plan, and why have they grown in popularity?

    Well, buy now, pay later isn’t exactly a novel idea. Just as the name suggests, this payment option allows those who use it to get goods before they finish paying for them.

    For obvious reasons, it hasn’t been popular with stores. However, buy now pay later services today help ensure that all the payments are made by the customer, eliminating the risk for store owners while helping them close in on as many sales as possible.

    And since the service makes it easier for customers to make large purchases, BNPL loans naturally grew to what they are today. It also helps that Afterpay and other BNPL financing options are interest free payment plans.

    In this post, we will cover everything we need to know about Afterpay, from how Afterpay works to whether or not it’s worth the hype. To see how Afterpay compares to other buy now, pay later apps, check out our Klarna vs Afterpay and Affirm vs Afterpay articles.

    What is Afterpay?

    Afterpay is a buy now, pay later service that was founded in Australia in 2015. The app allows consumers to make an initial payment on goods, receive the goods, then make the rest of the payment installments over six weeks. Like most BNPL services, Afterpay is a zero interest payment plan.

    The service thus allows consumers to purchase expensive goods, or goods they simply can’t afford right away, at an easy-to-manage pace. This method is especially convenient for goods with limited stock or that sell out quickly.

    The service can be accessed via a mobile app, the Afterpay mobile app.

    How Does Afterpay Work?

    Now that we know the general workings of a BNPL payment plan, let’s get into the particulars of Afterpay’s system.

    How Do I Access Afterpay?

    Like most buy now pay later apps, you have to download the app and then sign up. To successfully join the Afterpay app, you must be 18 years and older. You will also need to be the legal holder of a credit card or debit card.

    Remember that even without a bank account, you can still sign up for Afterpay with your credit or debit card. However, to apply for a credit card without a bank, you need a good credit score. 

    How Do I Shop on Afterpay?

    Once you are on your Afterpay account, you browse for the store you want to purchase from in the ‘Store Directory.’ Not all stores have an Afterpay option though.

    Once you find the store you want to purchase an item from, simply choose Afterpay as the payment method at checkout. For in-store purchases, you will have to go through an eligibility test to establish whether you can get an Afterpay Card. The card can then be used with either Google Pay or Apple Pay for an in-store purchase, whichever you prefer.

    How are Payments Installments Done on Afterpay?

    When it comes to how the payments are done, the order value is divided into quarters, which is 25% per installment. That makes four equal payments, with a mandatory first payment, or down payment, before you receive the item.

    You need to ensure that the purchase price of the item is more than $35. So, for Afterpay, the minimum down payment is $8.75. However, some stores may have a minimum down payment that is higher than that. 

    After the first payment, three-quarters of the total price remains. The rest is then paid after every two weeks in equal payments. Thus, you make the rest of the payments over six weeks. Most Buy Now Pay Later services use this method.

    Afterpay, however, stands out from most of the crowd by adding one unique feature. By maintaining a positive payment history and frequently using the service as your payment method of choice, you earn points.

    This loyalty program is known as Afterpay’s Pulse Rewards Program.

    Afterpay’s Loyalty Program: Pulse Rewards

    Afterpay’s Pulse Rewards Program works by awarding points based on how frequently you use their app, whether or not you make on-time payments, and how much you spend over a certain duration from your first sign-up. The amount of points you have determines the level or tier that you are ranked in. The higher the tier, the more the perks.

    Pulse Rewards sorts users into three tiers of loyalty:

    • Gold, 0-99 points 

    • Platinum, 100-499 points

    • Mint, 500+ points

    Each time you make an on time payment, and use the platform to make transactions over $40, you earn ten points. The points are collected over six months from the time you sign up. Since they also look at your Afterpay payment history, avoiding late fees is paramount. Making online purchases on Afterpay as much as you can also helps you build credit.

    Once you have been on the platform for six months, apply for Afterpay’s Pulse Rewards Loyalty program by visiting the ‘Rewards’ tab on the Afterpay app.

    Here is a quick look at what benefits each tier offers:

    Delaying payment of downpayment by two weeksYesYesYes
    Extending payment due dates by seven daysYes, only three times a yearYes, only six times a yearYes, only six times a year
    Exclusive discounts for every 100 pointsNoYesYes
    Special early access to sales from specific merchantsNoYesYes

    Does Afterpay Have a Credit Limit?

    As a new user, the credit limit will be $500. For anyone who is just starting to build good credit history, or for some reason has bad credit, this is a great credit limit!

    However, if you feel that $500 is a little low, all you have to do is keep using the app and making on time payments. Doing this could raise your credit limit to $1500.

    How Afterpay Deals With Missed Payments

    Of course, there has to be some way of making sure overdue payments are kept at a minimum. Afterpay and other BNPL services all have different ways to control these issues, with Afterpay choosing the route of late fees.

    At first, the fee is $10. But it’s called a ‘partial’ late fee because if the payment is not paid after seven days, an additional $7 is added. Luckily, this only applies to orders equal to or more than $40.

    Afterpay’s late fees method for penalizing late payments is one of the stricter approaches amongst its industry peers, though some are indeed stricter. For example, on Sezzle, a partial or late payment will lead to account deactivation. You won’t be able to purchase anything during that time and you will have to pay $15 for reactivation.

    However, on Affirm, late payments affect your credit score, but only on their platform. They charge no late fees. So, the only thing to look out for is your payment history.

    The good thing about all of these platforms is that none of them send a credit report to any credit bureaus. Therefore, your credit score is always safe.

    Here is a comparison of the intensity of fines for late and missed payments on different apps:

    Late FeeYesNo, but $15 reactivation feesNo
    Account DeactivationNoYesNo
    Credit Score (on the platform)NoYesYes
    Sending a Credit Report to Credit BureausNoNoNo
    Affecting credit card limitNoNoNo

    Does Afterpay Check Credit History or Send a Credit Report to Credit Bureaus?

    Luckily, if you are a young person handling your first credit card or simply looking to build credit score, using Afterpay does not affect your credit history. They also will not report you to any credit bureaus. The main reason all this is possible is that Afterpay does not conduct a hard credit check on a person’s credit history.

    However, they may perform a soft credit check on new customers. These kinds of checks do not affect your credit score. They only give Afterpay an idea of how you pay bills.

    Why Should Buyers Use Afterpay for Buy Now, Pay Later Payment Plans?

    All this sounds great, and is much better than a high interest credit card. But does it beat good-old saving? 

    We’d like to make the argument that it does. Here are some points to consider:

    • Cognitive offloading: Cognitive offloading is the act of using a physical action to reduce cognitive stress. Instead of struggling to save and constantly denying yourself, why not get an app that will help you stay disciplined and motivated to pay up? We already have a lot on our minds.

    • Limited stock items: BNPL companies allow users to purchase items that quickly run out of stock. They eliminate the frustration of being able to afford an item, but having to miss out because the money is not readily available.

    • Protects credit score: BNPL companies do not affect your credit scores as they only do soft credit checks when necessary.

    • No penalty for early payment: Paying Afterpay balances early doesn’t incur penalties as it does for traditional loans.

    • No interest charge: need we say more? Interest free financing options are like a dream come true.

    How Does Afterpay Make Money with 0% Interest Rates?

    So, Afterpay does not charge interest; how does it make money? There are two main ways:

    • Fees imposed on late or missed payments

    • Merchant fees

    Does this mean that Afterpay will try to make you miss your payments? Luckily, it won’t! In 2019, less than 20% of Afterpay profits come from late fees. In fact, throughout the years, only a minority of profits come from late fees.

    Afterpay makes most of its money from merchant fees. They comprise a flat rate of $0.30 and a sales commission that ranges between 3% and 7%. These fees aren’t exploitative either, with stores paying for the increase in sales a manageable payment plan offers consumers. 

    Disadvantages of Using Afterpay

    Of course, there have to be a few issues to look out for! However, the good news is that they aren’t many. In fact, there are only two main issues you must look out for:

    • Getting carried away and going over your spending limit

    • Late fees

    For the first issue, you just need to ensure that you are financially savvy. Knowing you can buy an expensive, online purchase does not necessarily mean you should. Sometimes, even if you can ‘manage’ the installments over several weeks, it is still better not to make the purchase.

    Also, just because delinquent payments will not affect your credit history or future purchases on the Afterpay app, doesn’t mean you aren’t incurring interest and extra charges elsewhere. For example, you may affect your credit card by going over your spending limit or end up having to take personal loans to avoid late fee charges, etc.

    Finally, the most common yet avoidable risk is missing payments! Luckily with Afterpay, you can delay payments by seven days if you are in the Pulse Rewards program, but only for a limited number of times per year. The best strategy for enjoying your experience on Afterpay is finding a foolproof way to manage all your payments and due dates.

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