Since 2020, when the pandemic started, installment payments have boomed in popularity along with the surge of online shopping or e-commerce. One of the common installment payment plans you will see when shopping online at retailers like Amazon, Walmart, and Target is the Buy Now, Pay Later (BNPL) option.
Also known as point-of-sale loans, BNPL is a type of short-term financing that allows consumers to purchase items (like clothing, furniture, electronics, workout equipment, travel ticket, etc.) and pay at a future date by splitting up the cost in a course of weeks or months instead of paying the entire purchase upfront. Unlike credit cards, it often comes free of fees and charges. It is comparable to unsecured or personal loans.
Some of the most famous BNPL providers are Affirm, Klarna, Afterpay, Zip, and Paypal’s “Pay in 4”. Moreover, credit card issuers like Chase and American Express have also set up the same financing arrangements.
According to a recent survey, almost 45% of shoppers (a 41% jump since April 2021) in the U.S. have signed up for at least one BNPL plan. Of those shoppers, 22% regret using this financing plan and about 30% said they’ve struggled to pay during the scheduled payments because they had to skip paying an essential bill to prioritize their BNPL loans.
How does Buy Now, Pay Later work?
Buy Now, Pay Later programs have their own terms and conditions depending on the merchant and provider. However, generally, they all operate through the following steps:
- You make a purchase at a participating merchant and use BNPL at checkout.
- In a matter of seconds, you will know the result whether you qualify for this financing option or not because companies only conduct a soft credit check. If approved, you pay a small amount of down payment (25% of the total purchase for example).
- The remaining amount due is then paid in a series of interest-free installments. You can pay via bank transfer or check or payments may also be deducted automatically from your debit card, credit card, or bank account.
Even if you’ve been declined for other loan options because of a low credit score, it is possible to get approved for BNPL. Also, getting BNPL loans add only to your personal loan debt and not that of a credit card, so it usually does not affect your credit score since the installment plans are often too short to be reported to the credit bureaus.
Advantages of Buy Now, Pay Later finance
As briefly mentioned in the previous section, BNPL has the following advantages:
- Convenient and easy to use
- Fast approval
- High credit scores are not necessary to qualify.
- Zero-interest or lower interest than credit cards most of the time
- Allows you to link payments to your debit card, bank account, and, in some instances, a credit card
- It may also be available at certain retailers offline.
Disadvantages of Buy Now, Pay Later
- Getting BNPL loans and paying them on time does not help you establish good credit. This means that you’ll also miss out on any credit card perks offerings, including reward points and cash-backs.
- Payments can be hard to track.
- Fees and penalties can be triggered if you miss a payment or you don’t have sufficient funds in your linked bank account. Sometimes, interest charges (usually higher than credit card interest rates) may apply for the remaining payment period.
- If the product did not arrive or was defective, it can be difficult to receive a refund because you have to contact both the BNPL provider and the merchant. Additionally, even if the defective item has already been returned, payments may still continue.
- Having BNPL financing available may tempt you to do impulse purchases. The Strawhecker Group reported in 2021 that 55% of consumers who have availed of BNPL tended to spend more compared to other payment options.
What to consider before applying for Buy Now, Pay Later finance?
BNPL is undoubtedly a convenient form of financing if you do not have the money to make an upfront purchase. But just like other lending products, this can have a great impact on your finances if not planned and managed well. Here are some things you should be aware of prior to entering into a BNPL arrangement.
- Impact on your credit standing
Most BNPL providers like Affirm only perform a soft credit check rather than a hard credit inquiry. Before applying, verify if the company is going to pull your credit information from the credit bureaus. If yes, you have to be aware that making regular on-time payments could positively impact your credit score, and failure to pay on time could harm it. Take note also that larger providers like Affirm normally report activities to the credit bureaus, while others like Klarna only report negative actions like failure to pay.
- Repayment terms
Some providers may require biweekly payments over a month-long period while others may give you three months or longer to pay off the remaining balance. Furthermore, the interest rates may also vary depending on the terms.
Knowing how the repayments will work is important to know if you can afford the purchase and make payments on time. As a practical example, a $500 purchase might cost a $50 monthly payment for 10 months, but you have to consider whether your source of income is sufficient for this 10-month hook. The decision to take depends though on the item as this cost for a new mattress could be a great deal compared to when you are purchasing a new pair of shoes you don’t really need.
Moreover, in cases where you agree to set up an automatic link to your bank account for payment settlements, you should closely monitor your funds if they are sufficient for the upcoming payment schedule or not.
Check if your loan comes with 0% APR financing or not. High APRs are very costly, and it might actually cost you less to use cash or a rewards credit card. Look also into the consequences of missed payments becomes some BNPL loans collect high fees for these.
- Return policies
Some companies may apply shipping and/or restocking costs, and if you’re denied a full refund, you will be stuck paying for something that you are not able to use at all. Also, on some occasions, the merchant may allow a return of an item but it is not possible to cancel the BNPL agreement until proof of return has been validated.
To check out other loan options, read Secured Loans Vs. Unsecured Loans.