Embedded Lending: The Risks and Rewards of Paying by Installment

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Embedded lending

Lending as a practice has been around for thousands of years. The first instance of lending was recorded in ancient Mesopotamia, and debt has played an essential role in the lives of individuals ever since.

Today, people borrow money for the same reasons they did thousands of years ago: to get something now that they can't pay for right away. Lending has changed a lot from ancient times. Now it's a booming industry that involves thousands of businesses and — since 1989 — credit scores.

Embedded lending is financing that allows businesses to offer consumers an installment plan at the time of purchase. 

But what exactly is embedded lending? How does it work? And perhaps most importantly — should you use it?

The Short Version

  • Embedded lending via installment payments is new, but embedded finance is older and more established.
  • Embedded lending deals may offer buyers a way to pay for their purchases over multiple payments with less interest and fees than traditional financing, or none at all.
  • But while it may provide benefits, embedded lending could still be dangerous for those who struggle with spending or who may miss a payment.

What Is Embedded Lending?

Until recently, when you thought of lending, you probably thought of credit cards, lines of credit, or even payday loans. Regardless of the type of lender, they all have one thing in common: they are third-party lenders, which means they act as an intermediary between you and the retailer.

Embedded lending takes out the middleman. It aims to offer an invisible and seamless lending experience in a few clicks. Instead of working through third-party lenders, retailers and other businesses can use AI lending software to analyze credit scores, determine reasonable loan amounts, and disperse the funds, all within a few seconds.

The type of embedded lending you are most likely already familiar with is Buy-Now-Pay-Later (BNPL), for example, Klarna or Afterpay. These companies offer BNPL services with major retailers like Sephora, Coach, and Nike.

When you shop at these and many other retailers, you can either pay for your purchase in full at check-out or opt for BNPL. You'll use BNPL to make one payment at checkout and subsequent payments on a schedule. Four payments at two-week intervals is a typical payment schedule.

For many consumers, BNPL lending is appealing because it typically doesn't charge fees or interest on the payments.

The Rise of Embedded Lending

While embedded lending is relatively new, embedded finance has been around for more than a decade. One of the first examples of embedded finance was Shopify, an online shopping platform founded in 2006. Shopify provides a way for small retailers to sell their wares without building a dedicated platform themselves.

After Shopify came rideshare service Uber, which was founded in 2009. DoorDash followed not long after in 2013, and Uber added Uber Eats in 2015.

Finally, we have the BNPL services we mentioned previously; Afterpay announced its USA expansion in 2014 and Klarna arrived on the scene in 2015.

Embedded lending became popular in 2019, and the 2020 pandemic brought these companies into the spotlight as more and more consumers stayed home and shopped online.

In 2021, embedded finance was a $2.6 trillion industry, making up about 5% of all US financial transactions in 2021. By 2026, the size of the embedded finance industry is expected to exceed $7 trillion.

Why Is Embedded Lending Becoming So Popular?

Embedded lending has become popular because it's an easy-to-use product that spreads your purchases out over multiple payments.

In most cases, there is little to no downside for buyers provided that they make their monthly payments on time. And from a vendor’s perspective, embedded lending can help them increase sales as they help buyers afford purchases they’d otherwise have to wait to make.

But while embedded lending can be a win-win for consumers and businesses, it’s not a slam dunk. Like with any financial service, there are pros and cons to using embedded lending.

Pros and Cons


  • Fast — Businesses and individuals want access to loans quickly. Embedded lending cuts down processing time from days to minutes.
  • Simplified processing — Instead of filling out lengthy applications as an individual or providing mountains of paperwork as a business, embedded lending simplifies the process by requesting fewer details while still being able to disperse loan amounts.
  • Completely digital — Embedded lending doesn't require in-person meetings, visits to bank branches, or the printing, signing, and scanning of documents.
  • Competitive rates — Interest rates are often cheaper or on par with the interest rates associated with other debt tools like credit cards or lines of credit. For example, Klarna offers 0% interest.


  • Slippery slope — Embedded lending might be a little too easy. Some would argue that it reduces barriers to spending, which can lead to too much debt and unrestrained spending.
  • Difficult to monitor — Carrying different debts with different retailers and lenders can make it harder to keep track of how much debt you have.
  • Debt-by–default mentality — When you finance everything, it’s easy to default to choosing debt instead of saving up for purchases. This behavior can lead to an endless cycle of debt.

What Other Services Use Embedded Tech?

While embedded lending might seem like a new trend, embedded technology and finance have been part of our world for years.

Anytime you use a service like Uber, buy a product through Shopify, or send an invoice using an accounting program like Freshbooks, you use embedded finance. These services offer an end-to-end experience, usually through an app or a website, that lets users perform essential functions without ever having to leave the app.

Embedded tech encompasses an even broader spectrum, covering any smart device, from digital watches to appliances, cameras, and thermostats.

The Bottom Line: Should You Use Embedded Lending?

Embedded lending is a relatively new technology, but it’s proving helpful to buyers and retailers. As a buyer, if you have a good handle on your budget, don’t tend to overspend, and are simply looking for a way to make your purchases a little more affordable, using embedded lending can be a good choice.

That said, if there’s a chance you'll miss payments or become reliant on the service, it's best to stick to paying with cash whenever possible.

Do a deep dive into debt: 

Jordann Brown

Jordann Brown is a millennial money expert and personal finance blogger based in Nova Scotia, Canada. Jordann is the founder of the popular personal finance blog, My Alternate Life, and she frequently appears as an expert in Canada media.

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