Buy Now Pay Later (BNPL) services allow consumers to make purchases online or in store by breaking up larger ticket items into a small number of fixed installment payments. BNPL is attractive to consumers because purchases are typically interest free and don’t involve many of the fees that come with bank accounts and credit cards.
When you are online shopping and proceed to the checkout page, you traditionally have the option to pay with a debit or credit card; at this stage, many websites now offer a Buy Now Pay Later option through a major BNPL company, such as AfterPay, Affirm, Klarna, or Sezzle.
For example, rather than paying $400 up front for a four-piece luggage set, a Buy Now Pay Later plan allows you to pay for the set in four installments of $100 due every two weeks.
The popularity of BNPL has grown exponentially in recent years — and for good reason. These payment options provide more opportunities for people of underserved and underbanked populations. However, there are also a number of potential risks involved.
Pros of Buy Now Pay Later
Easier access to goods and services
There are a number of reasons why a consumer wouldn’t want to pay for a product or service with cash, or a debit or credit card. Perhaps they’d prefer to space out the payments in installments or they want to avoid interest charges that come with a traditional credit card.
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.
Low-to-no 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 no fees and no interest. Credit cards and loans can come with lofty interest rates, late fees, and other charges. 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.
Maintain and build your credit score
Buy Now Pay Later can be an especially valuable payment method for younger people and people with low or no credit history. It gives you access to products and services that you otherwise wouldn’t have access to, and allows you to build your credit score through on-time payments. This is only relevant if the BNPL service provider that you are paying through reports payments to the top credit bureaus — Equifax, Experian, and TransUnion. If the provider does not report payments, you will not see a change in your score.
You can also maintain a good credit score with Buy Now Pay Later plans. When you apply for a credit card or loan, the issuer or lender will conduct a hard inquiry into your credit report, causing your score to drop several points. BNPL service providers do not conduct hard inquiries.
Cons of Buy Now Pay Later
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. Buy Now Pay Later makes it easier to buy things impulsively, especially things you might not actually need. In many cases, products bought through Buy Now Pay Later are ones that should be budgeted for and paid for with cash or debit. This payment method can make 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 services advertise themselves as fee-free, interest-free programs, but there’s usually a fine print to those statements. Buy Now Pay Later can be fee-free and interest-free as long as you make your payments on time. However, if you miss one or more payments, some service providers treat their loans as any other credit card company would.
You could be on the hook for late fees and interest charges. If the provider reports payments to the credit bureaus, it could cause your credit score to decrease. If you miss a number of payments, some providers can report your charges to a collection agency, similarly decreasing your credit score.
Buy Now Pay Later could also harm your everyday banking activity. When you sign up for a payment plan, the funds are usually taken out of your checking account on a regular basis, though you may be able to connect a credit card with some services. If you connect a checking account and do not have enough funds in your account to cover the payment, you could 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. Occasionally the company will help facilitate conversations with the BNPL service provider, but you will often have to communicate directly with the provider, such as AfterPay or Klarna, to manage your return.
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. Knowing the details of the service provider that you are working with and staying on top of your payments is essential to have a successful Buy Now Pay Later experience.
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,” says the Consumer Financial Protection Bureau, an agency committed to ensuring that consumers are being treated fairly by banks, lenders, and other financial companies.
Buy Now Pay Later can be used with the click of a button, but you should think carefully before using it. These programs have just as many downsides as they do upsides.
In order to use Buy Now Pay Later responsibly, you should give yourself a waiting period before making a purchase. Wait a day or two to decide if the product or service is something that you really want or need. If it is something that you want or need, is it something that you can budget and pay for with cash or a debit card?
Another thing to consider: Is it a purchase that you could benefit from by paying with a credit card? Some credit cards offer excellent perks, such as cash back or miles, if you pay for certain items with the card. As long as you make your monthly payment in full and do not accrue interest on the purchase, it could be worth it to pay with credit rather than Buy Now Pay Later.
And if you ultimately decide that Buy Now Pay Later is the best decision for you, make sure that you are reading the service providers terms and conditions and making on-time payments so you do not get stuck with fees, interest charges, or credit damage.