Buy Now, Pay Later (BNPL) is a payment option that has grown quickly in popularity – a type of short-term financing that is often interest-free and allows shoppers to make a purchase with little or no money down, and instead to pay off the purchase in installments. For consumers, using BNPL can be very convenient and seem attractive, but be sure to have a good understanding of the pros and cons before choosing BNPL.
Pros:
Increased convenience. Whether shopping online or in-store, the BNPL option is integrated into the checkout process, which makes it simple and convenient to use. For those who want to make a purchase, but don’t have enough funds on-hand or in their account at that moment, this payment option allows them to get the item immediately, often with little or no money down. The remaining balance is then billed to their debit or credit card in a series of weekly or monthly payments until the purchase is paid in full. Credit checks are not required for the vast majority of BNPL options. So if someone is having trouble getting approved for a credit card because of poor credit, or no credit, BNPL can be a convenient alternative.
Interest-free. One of the most enticing selling points of BNPL options is that they generally are interest-free. If the repayment terms include paying over multiple months on a BNPL purchase, the buyer wouldn’t spend more than if they had paid in full immediately. This is not the case with most credit cards because interest is charged to the credit card balance every month. However, interest and fees can be charged for missed payments on a BNPL plan.
Automatic payments. Instead of having to log into an online or mobile banking service to make payments, BNPL makes things easy. The buyer chooses the account from which the installment payments will be drawn. Then, as they come due, the BNPL provider automatically takes out the money. This is easy on the consumer because it eliminates the chances of missing a payment through human error. However, note that automatic payments will not clear if the account does not have sufficient funds. So whether it’s BNPL or any other automatic withdrawal program, be sure the account has enough funds to allow payments.
Cons:
Impulse purchasing. Because BNPL is so easy to use, people can spend money impulsively. Not having to pay the full price up front for a service or product makes overspending and racking up debt easier than ever. While full payment isn’t immediately required, eventually the money still needs to be paid. So before making a purchase using BNPL, ask, “If I can’t afford this right now, will I really be able to in a few weeks?” If the answer is “No,” do not use a BNPL service.
Credit score. Enrolling in BNPL typically does not involve checking the buyer’s credit score. However, missed payments may be reported to the credit bureaus. This means the buyer’s credit can be affected by the service. Missed or late payments can lower a buyer’s credit score and make qualifying for future loans or credit cards more challenging.
Fees and penalties. A major selling point of BNPL is that the service is interest-free, which is true if payments are made on time. However, interest and fees can be charged after late or missed payments. Late fees are usually in the $5-$10 range, and sometimes are capped at 25% of the purchase value. Be sure to review the BNPL terms and conditions before enrolling, as unexpected fees can add up.
So, if the option to use Buy Now, Pay Later presents itself, should people enroll? The choice is a personal one – much like using any other financial product. Review the pros and cons, and consider personal spending habits and financial situations to determine if BNPL is a good option.
