What is Afterpay and How Does It Work?

Article Summary:

Afterpay is a form of buy-now-pay-later financing that allows you to pay for purchases through four interest-free payments. That being said, late payments to Afterpay incur late fees that can quickly add up, and the platform may decide to decline your order if you don’t have enough in your bank account.

Afterpay is a payment platform that allows users to pay for expensive items through four installment payments. All of these payments remain interest free even if you make one payment late. Because of this option, Afterpay quickly became an invaluable resource for millions of online shoppers.

However, that doesn’t mean there aren’t any cons to using the platform. In this article, we’ll take a deep dive into how Afterpay works, how it makes money, and what the benefits and drawbacks are to using this payment method.

First, what exactly is Afterpay?

Afterpay is a buy-now-pay-later service that launched in Australia in 2015. It offers interest-free payments that are split into four equal installments paid every two weeks. This allows shoppers to pay for the purchase over time rather than all at once, making purchases more attainable for shoppers.

Afterpay became wildly popular in online shopping after its U.S. debut in 2018, leading the service to explode and partner with thousands of retailers. As of 2021, there are currently over 85,000 retailers working with Afterpay today and over 14.6 million active users.

How does Afterpay work?

Afterpay splits the original purchase price into smaller payments. At the time of your purchase, you’ll pay 25% of the total price. This will be your first of four equal installment payments.

When you use Afterpay to purchase something, you’re essentially taking out a small loan with a very short repayment plan. Afterpay pays the vendor for the item or service upfront while you pay Afterpay the first payment at the same time.


Let’s say you want to buy a new laptop for $2,000. (For the purpose of this example, we won’t include sales tax.) When you go to check out, you use the Afterpay app to pay for the laptop. That means Afterpay paid all $2,000 for your laptop, and you paid Afterpay $500.

After two weeks, you’ll pay Afterpay another $500. This payment plan continues until you’ve paid the entire sum in installments.

To see when the next payments are due, log in to your Afterpay account to view your payment schedule. The first installment is immediate, and you can even make your next payment before its due date. If not, Afterpay takes automatic payments from your credit or debit card on the due dates laid out in your payment plan.

How do you use Afterpay while shopping?

Depending on whether you’re shopping online or in-person, you must follow different steps to use Afterpay. Fortunately, this is a pretty simple process for both online and in-store purchases.

  • Online orders. For online orders, choose Afterpay as the payment option. You’ll then need to sign into your account, or create a new one if you haven’t used the platform before. Once all the payment information is recorded (both on the vendor’s and Afterpay’s website), the retailer will ship the order.
  • In-store purchases. To use Afterpay in-store, download the mobile app on your device and follow the in-app instructions to set up the Afterpay card. The Afterpay app allows you to store the card with Apple Pay or Google Pay.

Pro Tip

Link your Afterpay account to your debit card instead of a credit card. While it won’t help you save money, it may prevent you from sinking further into debt than you can manage.

How does Afterpay approve orders?

Though the payment platform makes shopping more accessible, Afterpay doesn’t approve all orders. There are several factors Afterpay considers before approving a purchase. While you don’t need to worry about Afterpay performing a credit check, keep the following in mind before you shop.

  1. Sufficient funds. If you don’t have enough money on your debit or credit card for the first installment payment, Afterpay will probably decline your order.
  2. Order value. In addition to making sure you can make the first payment, Afterpay look at the order’s total value. At this point, they’ll determine whether you can reasonably afford the repayment plan.
  3. Repayment amount. Even if this order isn’t super expensive, Afterpay may decline your order if you still owe a lot on other purchases.
  4. Open orders. Similar to your total repayment amount, Afterpay will also consider the number of “open” orders you have. An open order is one that you still owe money on, which you can check on the Afterpay website.
  5. Membership length. If you’ve used Afterpay for a few years and promptly repaid multiple purchases, you look more trustworthy to the service (sort of like a credit score).

What happens if you don’t pay your balance?

If you don’t pay your remaining payments, Afterpay won’t just charge you a late fee. For shoppers in the U.S., a late fee will be imposed if an installment payment remains unpaid for more than 10 days. There may be a late fee listed in the payment schedule; if not, the maximum late fee is currently $8.00. Any late fees you incur for a single purchase will also not exceed 25% of the order’s total value.

In addition to these late fees, you’ll also be locked out from submitting new orders with Afterpay until you pay your remaining overdue payments. There’s also the possibility that Afterpay will block you from future purchases.

What is your Afterpay limit?

When applying for an Afterpay card, you’ll be approved a specific spending limit, which you can find on your account. This spending limit may increase or decrease depending on your use of the app and payment history. However, most new accounts start with a spending limit of around $600.

To increase your credit limit, you need to show good debt management by making payments on time and in full. This is exactly what any regular credit card would require. Gradually, Afterpay may approve you for higher spending amounts. You may even be able to use Afterpay to pay for online purchases of up to $1,000.

Over time, this spending limit changes depending on your account use. If you pay Afterpay on-time for each installment payment, you’ll be in good standing and likely have a larger credit limit. On the other hand, if you’re a newer customer or have a history of declined or late payments, your credit limit will be lower.

Pro Tip

Afterpay currently doesn’t specify any maximum or minimum purchase prices for users, but retailers may. Before using Afterpay for a particular purchase, ask the vendor whether this is an appropriate payment method.

Afterpay refunds

Few people like everything they purchase, and fortunately Afterpay has considered that possibility. There are a few ways you could get a refund depending on whether you’re getting a full or partial refund.

If the merchant offers a full refund, future installment payments will be canceled and whatever you already paid will be reimbursed.

Partial refunds are a bit tricky. Let’s say you bought four shirts for a total purchase price of $100 and you already paid the first installment of $25. It turns out you only like one of the shirts, so you send the other three back.

If you paid upfront, you’d probably get a partial refund of about $75. With Afterpay, the refund first goes to the platform since they’re the ones who paid upfront. This means your remaining three payments are canceled.

Order PaymentsAmountPayment StatusAdjusted Schedule
1st Payment$25.00PaidPaid
2nd Payment$25.00Due in 2 weeksCanceled
3rd Payment$25.00Due in 4 weeksCanceled
4th Payment$25.00Due in 6 weeksCanceled

Pro Tip

Before you get any refund from Afterpay, speak with the vendor to find out their refund and return policies.

How does Afterpay make money?

Though you may think most of their money comes from late fees, Afterpay actually makes money by partnering with thousands of popular merchants and vendors.

As of 2021, Afterpay charges merchants a $0.30 flat fee on top of a 4% to 6% variable rate on each transaction processed through the platform. While this sounds exorbitant, many vendors hope that their increased sales will counteract this cost.

Let’s be clear: Afterpay does make money from late fees, it’s just not the only way Afterpay makes money.

Does Afterpay report your payment history?

Even if you make a late payment, Afterpay won’t report your payment activity to any credit bureaus or credit agencies. This is helpful for all shoppers, especially those with a low credit score or poor credit history who worry about applying for other payment options like a credit card or personal loan. However, if you’re trying to build your credit, Afterpay won’t help your score either.

In fact, there’s no credit score rule to using Afterpay, partially because the service doesn’t charge interest. This can be a huge factor for many users, as the current interest rate for credit cards hovers around 16%.

However, if you use your credit card to pay your four installments, you’ll still have to deal with high-interest credit card debt. And unlike Afterpay, your credit card company will report you to any credit bureaus for late payments.

Is Afterpay worth it?

If you’re positive you can pay off a purchase in a store that accepts Afterpay (and you’re sure it’s a good price) in four installments, then Afterpay can be a good deal. However, it may be better to get a regular installment loan or pay it off with a credit card that has a 0% APR introductory offer if you think you may need more than four months.

Pros and cons of Afterpay

Afterpay can be a useful tool for many shoppers who have trouble affording more expensive purchases. However, users must also consider the risks of using the platform before relying too heavily on Afterpay.


Here is a list of the benefits and the drawbacks to consider.

  • Interest-free installment payments. One of the largest expenses of paying with a credit card is the interest fees. Afterpay doesn’t charge interest regardless of how late the payment is.
  • Doesn’t report to credit agencies. Since Afterpay doesn’t check your credit score or charge interest, there’s no real reason to communicate with the credit bureaus. This means any late payments you make will not affect your credit score.
  • No credit check required. Regardless of your credit score, you can work with Afterpay. You may be restricted to a smaller spending limit, but you can still use the payment method.
  • Doesn’t build your credit. While many shoppers may be thrilled to hear that Afterpay doesn’t affect their credit, others may be dismayed. If you’re looking to build your credit through on-time payments, you may want to try a credit card or personal loan.
  • Late fees. Afterpay doesn’t charge interest, but they do charge late fees. If you’re not careful, these fees can quickly add up to a larger bill.
  • May decline purchase. Depending on your history with the platform, Afterpay may decide to decline your purchase they see as a financial risk.


Can I pay my Afterpay off early?

Naturally, yes, you can pay your remaining payments with Afterpay off early. This won’t save you any money, however, since you’re not charged interest. But making payments early frees you of the debt sooner and lessens the chance of late fees. So, you might as well if you’re able to.

What makes Afterpay safe for shoppers?

Afterpay uses the highest level of security in the payments industry. Namely, a PCI DSS, or Payment Card Industry Data Security Standards, Level 1 certified compliant Service Provider Organization. So it’s safe to say you’re in good hands. It’s merely up to you to take the reins and handle with care.

Is Afterpay good for your credit rating?

Unlike most payment methods, Afterpay doesn’t perform credit checks or directly impact your credit score. However, if you use a credit card to make your installment payments and don’t pay your credit card balance, your credit score may take a hit.

What bank is Afterpay?

Afterpay is not a bank or a credit union. It’s also not a debit or credit card, though it may act like a credit card in some ways. Instead, Afterpay is a digital payment platform that works with various financial institutions. This means you can use it no matter of who your bank account is with.

Key Takeaways

  • Afterpay is a buy-now-pay-later payment platform that breaks up payments into four interest-free installments.
  • As long as the merchant offers the platform as a payment method, you can use Afterpay for both online and in-person purchases.
  • Any late payments will result in a late fee of up to $8.00 or 25% of your order’s total value.
  • Afterpay does not perform credit checks or communicate with the credit bureaus. This can be good for anyone prone to late payments, but those looking to build their credit score should avoid using Afterpay.
View Article Sources
  1. Afterpay Installment Agreement – USA — Afterpay
  2. Our public inquiry on buy now, pay later — Consumer Financial Protection Bureau
  3. The Future of Fintech In A Coronavirus World — SuperMoney
  4. Banking Guide — SuperMoney
  5. How Do Prepaid Debit Cards Work? — SuperMoney
  6. Best Checking Accounts With No Overdraft Fees | April 2022 — SuperMoney
  7. Apple Pay vs. Google Wallet: A Comparison of Mobile Payment Systems — SuperMoney