Skip to main content

As its name implies, “buy now, pay later” allows you to make a purchase and get it instantly but pay for it later, usually in installments.

Most major retailers offer a buy now, pay later option, but whether you should take advantage of it depends on the plan’s terms and your financial circumstances.

Simply put, buy now, pay later plans are loans because you borrow money from a lender, whom you then have to pay back.

What is Buy Now Pay Later (BNPL)?

When a consumer wants to buy anything on credit without a credit card, a buy now, pay later agreement (BNPL) is offered to them at the point of sale.  When releasing funds for a point-of-sale loan, many lenders will first perform an instant soft credit check on the consumer (the kind that doesn’t affect your credit score).

Customers have a variety of alternatives for repaying the loan balance, depending on the lender they choose and the amount they borrow; some payment options carry interest, whereas others do not, and some lenders impose late fees or other costs for missing payments.

Is BNPL a loan?

Yes, to put it simply. Buy now, pay later plans are loans because you borrow money from a lender, whom you then have to pay back. Even though there is typically no interest charged, at least initially, buy now, pay later is still seen as a loan, and your credit report will reflect this.

It’s crucial to take all the usual precautions when enrolling in BNPL, as you would do when asking for any online loan because you might also be fined late payment fees for skipping your repayments.

How does Buy Now Pay Later work?

When using the “Buy Now, Pay Later” (BNPL) method to stretch out payments on a large purchase, your payments are divided into equal monthly installments over time, generally just a few months, similar to a personal loan. These loans are frequently interest-free as long as you make timely and complete payments.

Unless you’re authorized for a card with an initial 0% APR offer on purchases, this is different from a regular credit card purchase, which charges interest for each month you carry a debt.

What is the interest on BNPL?

Longer-term BNPL plans may impose an annual percentage rate of up to 30%, while a pay-in-four plan often does not. Depending on the business, fees, such as those for missed or rescheduled payments, can range from $1 to $10 and occasionally have a cap of 25% of the purchase price.

Who offers BNPL?

Many companies offer BNPL. Some of them include the following:

  • Affirm works with merchants like Walmart, Amazon, and Nordstrom. Its four-payment plan carries no interest at all.
  • A simple pay-in-four model is available with Afterpay. It collaborates with stores like Bed Bath & Beyond, Old Navy, and Gap. There are no additional charges with Afterpay as long as you make your payments on time.
  • Klarna is available in stores such as Sephora, Foot Locker, and Macy’s. There is no interest charged under its pay-in-four scheme.
  • PayPal provides a pay-in-four payment option online through its mobile app at retailers like Best Buy, Target, and Home Depot.
  • Sezzle, available at thousands of merchants, including Target, charges no interest when paid in four installments.

Does BNPL affect my credit score?

Your credit history won’t be affected as long as you make the agreed-upon payments on your loan. However, your credit history could be damaged if you don’t repay the loan when you were supposed to.

This is so because BNPL, a type of credit, shows your debt repayment patterns. So, you should be careful to pay back your BNPL on time to save your credit history in the long run.

Is Buy Now Pay Later safe?

Although this payment method may seem quite appealing, there are certain risks involved.

If the payments are not made on time, the customer may be charged fees and interest on the outstanding balance. You can also be charged late payment costs. This could put you in a debt cycle.

Additionally, it could be challenging for buyers to remember making monthly installments. The majority of customers have managerial issues, not financial ones.

The BNPL industry is currently unregulated on a federal level, in contrast to other consumer lending sectors like credit cards and mortgages, and the CFPB is thinking about taking action to regulate this revolutionary sector.

Is it better to use BNPL or a credit card?

Thanks to their low (and even zero) interest rates, BNPL plans are frequently less expensive than credit cards. While the average annual percentage rate (APR) for credit cards is about 16%, many BNPL companies charge 0% APR, making them a more cost-effective type of loan. However, not paying off your BNPL credit will lower your credit score, making it harder for you to get a loan.

Pros and Cons of BNPL

Pros of BNPL

You can divide your payments: Because you don’t have to pay in one lump sum, an expensive item may become more affordable.

There will be no credit check: BNPLs are easier to get than new credit cards because you don’t have to pull your credit report.

It’s quite simple: Online shoppers may like this way of shopping because they can get what they want immediately and know exactly what it is.

Can assist in cash flow management: A BNPL can assist someone in purchasing what they require at a price that works for their budget.

Cons of BNPL

Terms might change: It’s critical to understand the terms of a BNPL loan before agreeing to one. For instance, 0% interest might not apply for the entire term of the loan.

Some have set prices: Rather than just buying the item outright, these plans add a set fee to your monthly payments, which could end up costing you more over the course of the loan.

They don’t help you build credit: Your credit won’t improve if you make your payments on time. However, late payments could be noted and result in a negative effect.

May lead to excessive spending: A purchase may seem more reasonable if it can be repaid over time.