What Is Buy Now Pay Later?
Buy Now Pay Later, often shortened to BNPL, is an alternative payment option that allows you to split up a purchase into several equal installments, with the first installment due at checkout. BNPL is most commonly used for online purchases but can also be used when shopping in-store.
Some call it short-term financing. Others call it a point-of-sale installment loan or short-term unsecured loan. Whatever you choose to call it, Buy Now Pay Later is a form of debt that’s here to stay.
How Does Buy Now Pay Later Work?
BNPL started with the traditional Pay-in-4 plan, but there are now a variety of BNPL plans, each with its own terms and conditions. However, the general idea is the same:
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- When you’re ready to make a purchase, select the Buy Now Pay Later option at checkout (this may be through a company such as Affirm, Afterpay, Klarna, or Sezzle).
- Within minutes, the system will either approve or deny you the financing.
- If approved, you will pay the first installment at the point of sale.
- The remainder of your balance will be divided into equal installments due on predetermined dates.
For example, some BNPL services divide your purchase into four equal installments due biweekly over the course of one month. Others may spread your installments over a much longer time frame (sometimes even a year for larger purchases).
Your first installment secures your purchase, enabling you to take it home with you from the store or giving the merchant the green light to go ahead and ship it to you. Then, it is your responsibility to pay off your installments on time and in full.
Often, you can set up automatic payments so you can “set and forget” them, so to speak. If you’re not comfortable with autopay, you can also pay your installments manually.
After you’ve completed your purchase, some BNPL services will send you a confirmation email containing the cost of your future installments and their corresponding due dates.
Pros of BNPL
Before the pandemic, the world was already becoming increasingly digital (like how you’ve thought of a shirt and the same one pops up on your Instagram timeline the next day — we’ve all been there). But with consumers largely stuck at home over the past few years, they’ve had ample opportunity to pile things into their virtual shopping cart and click Purchase.
Here are some of the advantages of using BNPL:
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- BNPL enables you to make purchases even if the money is not currently in your account. For expensive items like electronics and furniture, spacing out your payments into four equal installments over time can give you the breathing room that you need.
- BNPL services typically do not require a hard credit inquiry (only a soft one). This makes them more accessible than other forms of credit. On top of that, BNPL services boast enticing offers like interest-free and fee-free payment plans, unlike many credit cards and other lines of credit.
- Easier access to goods and services. Buy Now Pay Later presents an alternative payment plan that enables consumers — whether or not they have a positive credit history — to pay for and enjoy things that may not have previously been available to them.
- Lower fees and interest charges. Buy Now Pay Later is technically a loan, but unlike your standard loans and credit accounts, their claim to fame is lower fees and interest. While many BNPL companies do not issue these charges, some do. It’s important that you read the company’s terms and conditions before making a purchase with Buy Now Pay Later.
Cons of BNPL
Some BNPL users call these services “addicting” because you have virtual access to just about any product or service out there. However, because the money only comes out of your bank account little by little, the financial consequences are not immediately apparent.
Here are some of the disadvantages of using BNPL:
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- Easy to overspend. Yes, Buy Now Pay Later makes online shopping convenient and accessible, but to use it, you also need a tremendous amount of self-control. BNPL makes it easier to buy things impulsively, especially things you might not actually need. This makes it more difficult to track your spending, stick to a budget, and save.
- Potential fees, interest charges, and credit score damage. Buy Now Pay Later can be fee-free and interest-free if you make your payments on time. However, if you miss one or more payments, some service providers may report these payments to one or more of the major credit bureaus), which can damage your credit score. If you connect a checking account to your BNPL app, you could even get hit with an overdraft fee from your bank.
- Difficult to manage. When you pay for a product or service using Buy Now Pay Later, you’re adding yet another element to your financial life. If you return the item, you’ll have an extra hoop to jump through. Additionally, each BNPL service provider has unique terms and conditions. Some service providers may include credit reporting; others may not. Some may issue late fees or hand your late payments over to a collection agency; others may stand firmly against it.
How to Use Buy Now Pay Later Responsibly
“Just because you qualify for BNPL or any other credit product, doesn’t mean you should use it,” — Consumer Financial Protection Bureau.
If you ultimately decide that Buy Now Pay Later is the best decision for you, make sure to use it responsibly by reading the service provider’s terms and conditions and following some or all of these tips:
1. Budget accordingly
Before diving into the world of BNPL, establish a realistic budget for your shopping needs. Consider your monthly income, expenses, and financial goals. Having a budget in place will help you determine how much you can comfortably afford to spend without straining your finances.
2. Track and Plan
Maintaining a clear record of your BNPL purchases is crucial for financial accountability. You could do this the old-fashioned way by manually updating your payments in a spreadsheet.
Alternatively, you can use Cushion to keep track of all of your payment plans across Klarna, Afterpay, Sezzle, Affirm, Zip, and more. This way, you’ll have a comprehensive overview of your spending on BNPL and can plan your payments accordingly.
3. Make timely payments
Treat your BNPL payments as any other financial obligation. Make payments on time to avoid late fees or penalties and maintain a positive repayment history.
4. Create a Waiting Period
Implement a waiting period before finalizing any BNPL purchase. This allows you time to consider the necessity of the item and assess its impact on your budget. Give yourself at least 24 hours to reflect on the purchase, helping you avoid impulsive decisions and regretful overspending.
5. Manage Multiple Simultaneous BNPL Purchases
Having multiple ongoing BNPL agreements can quickly lead to financial strain. Limit the number of active BNPL purchases to a manageable level, ensuring you can comfortably meet your payment obligations. Focus on paying off existing purchases before taking on additional ones. Get full visibility of your due dates across all BNPL providers in the Cushion app.
6. Consider Lower Installment Amounts
While BNPL services may offer the option to split payments over an extended period, it’s advisable to opt for shorter installment terms whenever possible. Although longer terms may seem more affordable in the short term, they can result in higher overall costs due to potential interest or fees.
7. Regularly Review Your Finances
Make it a habit to regularly review your financial situation, including your BNPL commitments. Take stock of your outstanding balances, payments made, and upcoming expenses. This practice allows you to adjust your budget and make informed decisions about future purchases.
How Is BNPL Different from a Credit Card?
Buy Now, Pay Later is a form of credit, but it is different from a credit card.
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- BNPL financing comes in the form of an installment loan. You pay 25% of the product’s price upfront, then pay the rest of it over a couple of weeks or even months.
- Credit Cards, on the other hand, give you access to a monthly credit limit. Any purchase you make using your credit card can be paid in full at the end of the billing cycle. Or you can choose to make the minimum payment set by your bank and let your debt be carried over to the next billing cycle.
Whether you use BNPL or a credit card is dependent on your financial situation, goals, and what you have access to. Since BNPL does not typically require a credit check, people with little or lower credit history may have an easier time securing BNPL financing.
Some credit cards offer excellent perks, such as cashback or miles, if you pay for certain items with the card. If you make your monthly payment in full and do not accrue interest on the purchase, it could be worth paying with a credit card rather than a BNPL plan.
Does BNPL Affect Your Credit Score?
Most BNPL services (though not all) will only conduct a soft credit check when you sign up for the service. This means that the company will look into your credit history, but the search will not cause your credit score to drop.
If a company does make a hard inquiry into your credit history, that will cause your score to drop several points; however, it should rebound within a relatively short period of time.
When you use BNPL responsibly and make on-time repayments, your credit score won’t be affected unless you use a third-party app like Cushion or enroll in Sezzle Up.
However, if you make a late payment or miss it entirely, some BNPL services will report your delinquency to one or more of the credit bureaus, which will harm your credit score.
Not only will this hurt your chances of being able to secure BNPL financing in the future, but it can also hurt your chances of getting access to other lines of credit.
