If you shop online, you’ve likely seen the option at checkout to “Buy Now, Pay Later.” This option can be incredibly appealing when making a large purchase because these incentives advertise a lower cost to you upfront, spreading payments out over time. But there are some things to consider when deciding whether to pay for something with a BNPL agreement.
“Buy Now, Pay Later” (BNPL) is a payment method that provides consumers with the flexibility to purchase items and pay for them in installments rather than paying the total amount upfront. Essentially, it functions as an installment loan, with varying interest rates and fees depending on the provider. The goal of BNPL is to break down the total cost of the purchase into smaller, more manageable payments spread out over time.
BNPL loans are typically issued by financial providers and banks through retailers. Popular BNPL companies include Affirm, Afterpay, PayPal, and Klarna. Some retailers offer their own BNPL options as well.
When selecting a BNPL option at checkout, you’ll likely be asked to fill out a short application, providing personal information such as your name and address along with your date of birth and Social Security Number. You’ll also need to provide a payment method, after which the BNPL provider will perform a soft credit check to determine your loan eligibility. Soft credit checks don’t impact your credit score but rather are used to assess your ability to take on a payment. Even with bad credit or no credit, you may still be eligible for a BNPL purchase, but approval criteria can vary.
While there are some differences among providers, the standard BNPL business model is typically a “pay-in-four” plan that breaks the total purchase amount into four equal installments. The first payment is usually due immediately, with the remaining three payments due every two weeks after that.
The benefit to BNPL over another loan option is that the initial agreements can be interest-free. So long as you pay your balance on time, BNPL can be a good way of spreading payments out over smaller installments without worrying about fees. Additionally, they are incredibly convenient since many retailers offer them at checkout. You don’t have to go through a lengthy approval period or fill out applications with other companies. The payment options are built-in, and the process of signing up is relatively similar to plugging in payment information.
While both are popular borrowing options, personal loans and BPNL plans have a few key differences that set them apart, most notably: how much you can borrow, what you can use the loan to purchase, and the length of the repayment period. BNPL loans are a type of loan that is often only available and used for single-consumer purchases and, because of that, you can usually only borrow enough to cover the cost of the purchase in your cart. Personal loans, on the other hand, are typically the preferred option when you’re looking to borrow more money that can be used for several purchases or non-consumer expenses. Unlike with a BNPL plan, personal loans can be used for almost anything, and the borrowing amount is typically higher, depending on how much you’re approved for. This means if you need money to consolidate debt, renovate a kitchen, or pay for your wedding, personal loans are the way to go.
Another significant difference between personal loans and BNPL plans is the length of repayment. For buyers interested in breaking up the payment on a single item into smaller, more digestible chunks, BNPL options can be great, however, the loan term is still only about six weeks long. Depending on your paycheck schedule and household finances, spreading the payment over only six weeks might not be enough time to truly be able to afford the purchase. In fact, due to how much you’re able to borrow, personal loans commonly have terms spanning three to five years with payments due monthly. Personal loans allow you to spread your purchase over a longer period of time and may have lower payments, which may put less strain on your monthly budget.
The decision to use BNPL may come down to your confidence in your ongoing ability to make the payments. Because of its convenience, many financial advisors recommend BNPL only for necessary expenses. It can be easy to overspend when you only have to pay 25% of the total price upfront, and while BNPL programs may seem low-cost and accessible, you’re still taking on debt that you will need to repay in a relatively short amount of time. If you can’t make your payments on time, these agreements may come with high-interest charges, some of which can be even higher than credit card equivalents.
When considering BNPL, you should think of it the same way you would any other type of debt with the additional consideration of whether or not you can repay the loan within six weeks. If that exercise bike or computer you’re interested in has payments you can’t meet, it may not be the best idea to make the purchase using BNPL.
Additionally, some consumers may feel wary about participating in a BNPL program due to the name of the financial partners attached. However, if you’re curious about which companies offer BNPL services, here is a resource you can use to research the most common providers and learn more about the Buy Now, Pay Later companies involved.
Buy Now, Pay Later options can be a valuable tool for making large purchases if you’re able to repay the full amount with the assigned interest within the six-week loan period. If repayment in six weeks doesn’t alleviate the financial strain of the purchase or you need a chunk of money to spend on several different purchases, it may be time to consider a personal loan for the longer loan term and flexibility. Although Buy Now, Pay Later can be a useful purchasing option, it’s important to consider what the convenience of the option actually provides to you and consider other financing options if it’s a stretch purchase for your budget.
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