Buy Now, Pay Later (BNPL) is a popular short-term financing option that has come to fruition over the last couple of years. Buy Now and Pay Later allows consumers to buy items now and pay for them at a later date. Often interest-free as long as certain arrangements are followed. Close to 40% of Americans say that they have tried some form of Buy Now, Pay Later at least once. BNPL has especially become a popular payment option for online shopping.
So how does it work?
BNPL financing typically requires you to make an upfront payment towards the purchase. Then, the remainder of the payments are set up in predetermined installments you need to make at future dates. Typically, these types of plans don’t charge interest. They are also much easier to get approved than traditional credit cards. Normally they won’t affect your credit score (although current legislation may change that). Paying late, however, or failing to pay the future payments, can damage your credit. It’s important to understand the repayment terms you are agreeing to. Know that they can be different for every BNPL company.
What is the difference is between BNPL financing and using a credit card? When using a credit card to pay for purchases, you’re only required to make the minimum payment due on the card each month while interest continues to accrue on the remaining balance. In essence, you can carry a balance indefinitely with no end in sight as to when it may be paid off.
BNPL financing, however, often won’t charge interest or fees, but they do have a fixed repayment schedule over several weeks or months. You know upfront what you will need to pay and when you will need to pay it. Generally, it’s the same amount and the balance will be paid off in a reasonable timeframe.
Pros of BNPL
As mentioned, these short-term loans are much easier to secure than a traditional credit card.
- Fast approval by online merchants makes it easy with a few clicks of a button to automatically get approved.
- It also can be an attractive way for consumers to pay for smaller purchases when shopping online. Especially since e-commerce has grown over the course of the pandemic. It’s convenient, disciplined, and easy to follow.
- A high credit score isn’t necessarily needed to qualify. Many BNPL companies only require a soft credit check for approval, which doesn’t affect your credit score. That is not the case with all of these companies, however, so make sure to read the fine print if this is something you want to consider.
- BNPL loans are frequently zero or lower interest than the credit cards that many consumers would otherwise use for these types of purchases.
Cons of BNPL
While this type of financing can be convenient, there are some potential downsides to consider.
- These types of financing services can make it easy for anyone to spend more than they should. When you get approved for a certain amount, are you sure you have the ability to pay that off in the number of installments that have been outlined in the acceptance? It’s tempting to accept it, but make sure you don’t get in over your head. In fact, 55% of consumers say they tend to spend more by using BNPL than they ordinarily would have using an alternate payment method.
- Not all purchases may be eligible for this type of financing, and there may be limits on the amount you can finance.
- Missing or late payments can result in late fees, which will ultimately damage your credit score. Also, double check your payment source. If you set up your payments to be made automatically from your banking account and you don’t have adequate funds on the payment date, you may be hit with an overdraft charge as well.
- You will not earn any rewards or cash back on your purchases that you may have been able to earn by using a different payment method.
- Did you order that perfect item and decide it’s not so perfect after all? Be careful, because payments may continue even if the item is returned, depending on the BNPL company. You may have to jump through a lot of hoops to prove that you did, in fact, return your item.
- BNPL financing can also lead to more impulse purchases or buying items that are unnecessary or too expensive, which may limit the amount of income available over future months. This can be especially difficult since these types of companies tend to be the most popular with young adults and lower-income consumers who may have trouble keeping up.
Investigations and Credit Reports
Recently, the Consumer Financial Protection Bureau (CFPB) announced it is going to investigate these types of businesses. Equifax also announced that it is going to start including BNPL information on your credit report starting this year. The CFPB will be checking that terms are clear and that these new loans are abiding by necessary consumer protection laws. It’s a positive step to make sure these BNPL companies aren’t selling personal data and are being watched.
Equifax also notes using BNPL for small purchases may be an easy way for consumers with bad credit to start raising their credit scores. An Equifax study found that including BNPL items in credit reporting could help the majority of consumers raise their FICO score by 13 points on average. Just follow the rules!
A number of companies* offer BNPL, including:
- Klarna
- Affirm
- AfterPay
- QuadPay
- PayPal
* Money Care does not endorse or recommend any of these companies.
At the end of the day, it’s important to make sure you understand what you are signing up for. It can be an appealing way to finance a smaller item that you don’t want to purchase all at once. But make sure you follow through with your agreement to meet the conditions. If the purchase is something that can wait, it may be best to do just that instead of adding another financial obligation to your short-term future.
This blog is published to provide you with general information only. It is not intended to provide specific or comprehensive advice. Money Care, LLC encourages individuals to seek advice from competent professionals when appropriate.
