Is "Buy Now, Pay Later" A Good Idea?Jun 4, 2023 | 0 Votes by Mel - rate Buy Now, Pay Later (BNPL) is a type of short-term financing option that allow consumers to pay for purchases over time, often interest-free. But while BNPL is a very convenient payment option to select at checkout, the relative ease at availing it makes it prone to overuse and late fees, thus, potentially damaging your credit score. This article discusses how exactly BNPLs work as well as when they are a good idea to consider—and when other financing options may be a better choice instead.
Buy Now, Pay Later (BNPL) is a type of short-term financing option that allow consumers to pay for purchases over time, often interest-free. Also referred to as "point of sale installment loans," BNPL arrangements don’t require good credit/high credit scores to qualify and are an increasingly popular payment option, especially when shopping online.
But while BNPL is a very convenient payment option to select at checkout, the relative ease at availing it makes it prone to overuse and late fees, thus, potentially damaging your credit score.
This article discusses how exactly BNPLs work as well as when they are a good idea to consider—and when other financing options may be a better choice instead.
How Does Buy Now, Pay Later Work?
While they share the same concept of allowing consumers to make purchases and pay for them at a future date, BNPLs such as Klarna, Afterpay, and Affirm have their own terms and conditions; however, they generally follow these steps:
1) Make a purchase at a participating retailer and choose the merchant’s authorized BNPL processor at checkout by clicking on its button or link
2) Fill out a short application directly on the checkout screen. It may ask for information like your name, email address, date of birth, phone number and Social Security number as well as preferred payment method.
3) A soft credit check will then be performed—which won't affect your credit score—and approve or deny your application in a matter of seconds.
4) If approved, you will then be required to make a small down payment, such as 25% of the overall purchase amount to finalize the order
5) Item will be shipped as normal and you will then pay off the remaining amount due in a series of equal interest-free installments, usually deducted from your debit card, bank account, or credit card automatically with some BNPLs also offering payment via check or bank transfer.
How to Get Approved for BNPL
As mentioned above, most BNPL arrangements don’t require good credit/high credit scores to qualify, but they do perform cursory checks on your financial history to determine your ability to pay for your purchases. These checks only take mere seconds and don’t affect your credit score. Some of the checks BNPL processors use include soft credit pulls, how long you have been using the processor, prior payment history with the processor, loans you may have outstanding, your credit utilization, available funds in your bank and debit accounts, current debts and income, information provided by the credit bureaus, and any bankruptcies.
Do note that some lesser known BNPL processors may conduct a hard pull of your credit, which could knock a few points off your score temporarily. Furthermore, some buy now, pay later loans can be reported to one or more of the three major credit bureaus (TransUnion, Equifax, and Experian). If the BNPL institution sends this information, the loan can show up on your credit reports, and it could potentially impact your credit score.
BNPL vs. Credit Cards
BNPL is different from making a purchase with a credit card even though both involve delaying your purchase payments. For example, when you use a credit card, you're only required to make the minimum payment due on the card each month. Interest accrues on the remaining amount (unless you've used a card with a 0% introductory APR) until you pay it off in full. But you can carry a balance indefinitely.
In contrast, BNPL arrangements often don't charge interest or fees. But they have a fixed repayment schedule—generally several weeks or months. You're told upfront what you'll need to pay each time, and it's usually the same amount. It's comparable to any other sort of unsecured personal or consumer loan.
This being the case, BNPLs can be an attractive way to pay for smaller purchases when shopping online, and its popularity grew during 2020, with the rise of e-commerce shopping in general due to the Covid-19 pandemic. What’s more, BNPL that is offered through a credit card company may carry lower fees or interest rates compared to the regular variable APR charged on outstanding balances.
Another major difference between buy now, pay later and credit cards, however, is the fact that not all purchases may be eligible for BNPL financing, plus there may be limits on the amount you can finance this way. Moreover, Buy Now, Pay Later schemes don't help you establish and build good credit, either (as more conventional financing methods do). You also will not be able to earn any perks that credit cards offer, such as cash back or rewards points.
It is also interesting to add that consumers should be wary of any predatory practices some BNPL institutions may be subtly applying on their clients. Case in point, Reuters reported in September of 2022 that the U.S. Consumer Financial Protection Bureau (CFPB) announced plans to start regulating BNPL companies due to worries their fast-growing financing products are harming consumers following an inquiry last year that found BNPL providers Affirm Holdings, Block's Afterpay, Klarna, PayPal, and Australia's Zip Co lacked standardized disclosures. CFPB, in particular noted that BNPL providers do not unilaterally give data to credit reporting agencies, and that lenders might have an incomplete picture of a borrower's liabilities, including BNPL loans at rival companies.
The agency also pointed to customer data collection as a consumer risk and said it would start identifying data surveillance practices BNPL companies should avoid.
Shopping Responsibly with Buy Now, Pay Later
While Buy Now, Pay Later is convenient and relatively risk-free, there are some things to be aware of before entering into a BNPL arrangement.
First, it is important to understand the repayment terms to which you're agreeing. Again, these can be different for every BNPL company. For example, some companies may require you to pay the remaining balance with biweekly payments over a month-long period. Others may give you three months, six months, or even longer to pay off purchases. And your interest rate, if there is one, might vary depending on the loan terms.
It is also necessary to know how to responsibly work out your payment schedules so that you can plan for them in your budget. This ensures that you are not only able to afford your payments but also make them on time. Missing a payment for a BNPL purchase could result in late fees, and a delinquent payment history could potentially be reported to the credit bureaus, which could hurt your credit score.
Also, keep in mind that while you may be approved for a 0% interest point of sale installment loan, that may not be guaranteed, so it is wise to carefully read the BNPL company’s terms and conditions. BNPL platforms can charge interest on purchases that can easily match or outpace what you might pay with a credit card.
Finally, consider return policies and how BNPL might affect your ability to return a purchase. The case may be that the merchant will allow you to return the item but you will have to provide proof that the return has been accepted and processed first before you will be able to cancel the BNPL terms—making it a time consuming hassle. Worse, there can be a delay until the merchant informs the BNPL lender of the refund. You may have to keep on making payments in the meantime. If you don't, the payment might be marked tardy or missing, and then you could incur fees, and those late payments will eventually negatively affect your credit score.
With the introduction of BNPL alongside the rise of e-transactions, payment is now quick, efficient and seamless. It’s no wonder why Buy Now Pay Later is turning out to be an increasingly popular financing option in light of these inflationary times. If you primarily shop online, BNPLs are appealing to those who want to purchase something immediately but can't or don't want to foot the bill for something all at once—usually without incurring any added interest while also getting a little extra time to pay for them.
Nevertheless, just like when you avail of any point of sale installment loan, you should always consider whether the BNPL payments are affordable and what penalties you may face if you're unable to pay. Read the fine print carefully so you fully understand the conditions to which you're agreeing.