More and more online retailers are providing ways to make affordable purchases accessible to most people. A payment option that’s gained in popularity over the past few years is “Buy Now, Pay Later,” which allows customers to place an order now but pay monthly or biweekly through automatic payments. This payment option allows consumers to pay for larger purchases over time, often without affecting their credit score or paying interest.
Buy Now, Pay Later services can certainly be helpful, but it’s important to also understand their potential consequences before opting to use one at checkout.
What Are Buy Now, Pay Later (BNPL) Services?
Buy Now, Pay Later (BNPL) services let you purchase items immediately and pay for them over time. You can break down the cost into smaller payments that you make weekly, bi-weekly, or monthly. BNPL services often don't charge interest if you pay off the balance within a set period, like 30 days or a few months. However, if you miss a payment or don't pay off the balance within that time, you could face late fees or interest charges. These services can be convenient but also pose risks, like accumulating debt, if not managed responsibly.
A BNPL loan works through a Buy Now, Pay Later provider that contracts with an online retailer to provide their payment option at checkout. When you choose a BNPL plan, the BNPL provider, like PayPal Credit and Klarna, pays for your purchase and gives you a loan to pay back.
Unlike some of the best credit cards, a BNPL loan usually does not have fees or an interest rate that tacks on additional money for you to pay. Instead, you’ll agree to a BNPL financing payment plan and make your payments in biweekly or monthly installments within an allotted time frame to avoid any extra fees.
Some BNPL lender options have a Buy Now, Pay Later app in addition to an online dashboard for customers to keep track of their payment schedules easily.
Pros of Buy Now, Pay Later
1. Quick and Easy Approvals
Perhaps the top reason why a Buy Now, Pay Later option is so popular at checkout is because of how simple and quick it is to set up. Typically, you just choose the option at checkout, fill in some basic information, like your name, email, and phone number, and agree to your plan. In most cases, a Pay Later provider will approve your payment plan on the spot, allowing you to continue the checkout process with your plan in place in a matter of a couple of minutes.
This is in contrast to a credit card, which may not offer instant approval, leaving you to wait several days or weeks before finding out whether you were approved.
2. Allows You to Pay Over Time
If you’re trying to figure out how to spend less money every month to improve your personal finances, Buy Now, Pay Later apps and services could be a good starting point, especially if you use them wisely and don’t sign up for several at one time.
Depending on the amount of your purchase, a BNPL provider typically splits payments into biweekly or monthly installments, with monthly installments reserved for larger purchases. Then, you can pay for your purchase over time rather than all at once, which can be helpful if you need to wait for another paycheck or simply want to keep this month’s expenses down.
3. Often Comes with 0% Financing
Interest can get you into debt quickly if you’re not diligent about paying more than your minimum monthly payment, but this isn’t something you typically need to worry about with a Buy Now, Pay Later service.
A Buy Now, Pay Later payment method usually offers no interest while you finance your full amount. So, if your order total comes to $300 to pay over the next six weeks, you’ll only pay $300 by the end of the six weeks, as long as you don’t have any late payment penalties added. Credit cards, on the other hand, often charge interest on any financed total, even if it’s as little as $5.
4. You Can Make Large Purchases Without Using Credit Cards
If you don’t have credit cards or try not to use them except for emergencies, you still have options if you need to make a large purchase. A BNPL service helps you break down that large payment into smaller ones, so you don’t have to pay it upfront.
This might help you afford everything from a new computer to a wardrobe for your new job – purchases that can be quite expensive if paid for all at once. With a Pay Later service, you’ll benefit from avoiding an increase in your credit card balance and money-draining interest charges.
5. Usually Won’t Impact Your Credit Score
Buy Now, Pay Later services usually don't affect your credit score – especially for smaller purchases of $1,000 or less. Most services use what’s known as a soft credit check, which pulls just enough information from a credit report and payment history to feel confident in extending financing to a customer. A soft credit check differs from a hard credit check in that it does not show up on a credit report or reduce a credit score.
A quick credit report check from each credit bureau can show you your recent credit checks. Unless stated explicitly by a BNPL service that it uses hard credit checks, its credit pull won’t be on your report.
Cons of Buy Now, Pay Later
1. It Can Be Easy to Forget About an Upcoming Payment
If your primary goal is to get out of debt, you probably won’t do yourself any favors by signing up for a Buy Now, Pay Later service. Although they’re attractive options when you need to buy something but are tight for cash at the moment, you risk digging yourself into a bigger hole.
BNPL services usually set up your payment on an automatic withdrawal schedule, and if you don’t track your schedule well, you could forget about your upcoming payment altogether. When that happens, your cash flow for the month might suffer, and you could even put yourself in overdraft status with your bank, leading to expensive fees.
2. Refunds and Returns Can Be Tricky
When you use a Buy Now, Pay Later service, you technically deal with two places: the BNPL service and the merchant you’re buying from. Although not impossible to accomplish, completing returns and getting refunds can be more challenging than if you were to pay the merchant directly.
Why? You usually have to wait for a refund after you’ve returned your item, and the merchant lets the BNPL service know about the return. Then, the BNPL service is tasked with issuing your refund. Depending on the merchant and BNPL’s speediness in doing this, it could take a few additional days or even weeks to receive a refund.
Be sure to read a BNPL service’s terms and conditions before using it to learn more about its specific process for refunds.
3. Late Fees and Interest Can Pile Up Quickly
Although most Buy Now, Pay Later services require automatic withdrawals to help you meet your obligation and prevent missed payments, you still could miss a payment if your connected payment method doesn’t have enough money to cover the installment. Depending on the BNPL provider, you might get charged a late fee or interest when this happens.
Unfortunately, late fees and interest can add up quickly, especially if you keep missing payments. But, as long as you keep enough money in your bank account to cover the costs of your automatic payments, you shouldn’t have to worry about extra fees.
4. You Could Get Caught Up in a ‘Pay Later Loan’ Cycle
Once you have one BNPL loan to pay for, your payments might eat into your budget. Then, when you have another big purchase to make, you might be tempted to get another BNPL loan to make it more affordable. Now, you have two payments to work around until your loans are paid off.
If not handled carefully, you could wind up in a continuous cycle of buying now and paying later just to make ends meet at the time. The problem is each loan you have adds another payment to your plate every two weeks or month, leaving less room in your budget to pay the bills and other necessities.
5. You Won’t Get the Same Rewards You Might from a Credit Card
There’s a lot to be said for a BNPL service that doesn’t charge interest like a credit card does. However, if you have a credit card with rewards, you’ll miss out on earning points or miles when you don’t use your card. If you think you can pay off a balance within a couple of months, you might be better off using your credit card to collect rewards rather than opting for the Buy Now, Pay Later loan.
What To Consider Before Using a BNPL Service
Before opting for a Buy Now, Pay Later service, make sure you can afford the payments. Missing a payment could result in additional fees or a negative impact on your credit score. For some purchases, consider alternatives like using a credit card, which may offer benefits such as rewards or better consumer protections.
It’s important to understand the payment schedule, as well as any interest rates that may apply if you don't pay off the balance within the promotional period. Knowing the full cost upfront can help you decide if a BNPL service is the right choice for you. This includes additional considerations such as fees, credit impact, and the company's return policy. Hidden fees can quickly add up, increasing the total cost of your purchase.
There is such a thing as good debt vs bad debt. However, BNPL services don’t really fall into either category, especially if you make timely payments. Most Buy Now, Pay Later providers don’t put your loan on your credit report, allowing you to pay for something over time without it affecting your credit. By weighing all these factors, you'll be better equipped to decide if a BNPL service is suitable for your financial situation.
Look for a BNPL service with 0% interest and automatic payment withdrawals to ensure that you don’t get extra fees added to your loan and keep your payment method topped up with enough money to make each payment. Before using a BNPL service, read the full terms and conditions of your loan to ensure you’re making the right purchase decision.
