In today’s fast-paced digital world, ‘instant’ has become the buzzword—even in shopping. Enter “Buy Now, Pay Later,” the modern twist on deferred payments that promises instant gratification without the immediate pinch on your wallet.
But as you sail smoothly through checkout, ever wondered how BNPL impacts your financial future? Read on to unpack the ins and outs of this trending payment method and its effects on your credit score.
What is buy now, pay later (BNPL)?
Buy Now, Pay Later (BNPL) is a short-term financing option that allows you to purchase items and then pay for them over a set period of time, usually in interest-free installments.
Some popular BNPL services include Klarna, Afterpay, and Affirm, among others. It’s like the old-fashioned “layaway,” but you get the item immediately instead of having to pay it off first.
BNPL is particularly popular among younger generations. In fact, 59% of Gen Z and 53% of Millennials are forecasted to use BNPL by 2026, according to Global Payments and Juniper Research. This is compared to just 24% of Baby Boomers and 41% of Gen X.
Also, as cost of living rises, there’s an uptick in people using BNPL loans to survive inflation. Traditionally, you’d find BNPL loans at furniture stores and beauty and apparel stores like Lululemon, Sephora, and Target. But now, retailers like Instacart, Delta, and even grocery stores are beginning to use them.
How BNPL works
Buy Now, Pay Later lets you buy items and pay for them over time. To qualify, you usually sign up with a BNPL provider like Afterpay, Klarna, or Affirm when checking out online. You choose a payment plan, often with several small payments spread over weeks or months. Then, you pay the BNPL provider in installments, not the store.
Most BNPL loans are interest-free if you pay on time. For example, say you’re shopping online for a new jacket that costs $100. At checkout, instead of paying the full amount, you see an option to use Afterpay (a BNPL provider). You get approved quickly and split the $100 into four payments of $25 each, paid every two weeks.
So, you get the jacket right away and pay only $25 today. Then, you pay another $25 in two weeks until the full $100 is paid. If you pay on time, you won’t pay any extra fees. But if you’re late, there might be a fee or interest.
Most BNPL providers conduct a “soft” credit inquiry when you choose their service. A soft inquiry doesn’t impact your credit score. Some providers might conduct a hard credit inquiry if you need to finance a larger purchase. A hard inquiry can temporarily reduce your credit score by a few points and will appear on your credit report.
Alternatives to buy now, pay later
While Buy Now, Pay Later offers a convenient way to spread out payments, there are other options to consider if you need more time to pay or are making a larger purchase:
0% APR credit cards: Some credit cards offer an introductory period with 0% annual percentage rate (APR). This means you won’t pay interest on your purchases for a set period, often 12 to 18 months. It’s like getting a short-term, interest-free loan, but the rate will increase after the introductory period.
Personal loans: With a personal loan, you borrow a specific amount and pay it back in fixed monthly payments over a set term, usually with interest. Personal loans can be good for larger expenses or consolidating debt.
Save up for the item: One of the most straightforward and safest methods is to simply save money over time until you can afford the item outright. This way, you avoid any potential interest, fees, or debt altogether. It requires patience but ensures you live within your means. As you save, keep the money in a high-yield savings account where you can earn interest.
Advantages and disadvantages of BNPL
Buy Now, Pay Later has become an increasingly popular payment option for shoppers. But like any type of loan, BNPL has its upsides and downsides. Here’s a closer look at the pros and cons:
Advantages of BNPL
Can take items home immediately
With BNPL, you can enjoy or use the products immediately without having to pay the full price upfront. People have used BNPL for everything from groceries to baby strollers to Peloton bikes.
Although it’s mostly used for online shopping, providers like Afterpay have digital cards you can add to your mobile wallet for in-store purchases.
Simple repayment structure
BNPL offers a structured payment plan that can be easier to understand for some consumers. Instead of having to deal with credit card minimum payments and confusing interest rates, your purchase is automatically split into smaller, scheduled amounts. This can make budgeting easier for some people.
Many BNPL platforms provide interest-free periods, especially if you pay off the amount within the specified time. This can save money compared to traditional credit methods that might charge interest from day one.
Disadvantages of BNPL
May lead to overspending
With the ease of BNPL, it can be tempting to buy more than you can afford. This can lead to accumulating debt if not managed responsibly. That’s not to say that BNPL services are inherently bad. They’re not. But they can wear on your financial health if you take on too many loans or don’t pay them off on time.
Must use autopay
Most BNPL loans require you to enroll in autopay for loan repayments. While this can help ensure you make your payments on time, it can also cause you to overdraft your bank account if you have insufficient funds.
Late fees and higher interest
If you miss a payment or don’t pay off the full amount within the interest-free period, you might be hit with hefty fees or a higher interest rate. For example, Afterpay’s late fee can be up to 25% of your purchase amount. This can make the initial purchase more expensive in the long run.
Doesn’t build your credit
While some BNPL providers may not check your credit at the onset, missed payments or defaults can negatively impact your credit score if your account gets turned over to collections. This can make it harder to qualify for loans or other financial products in the future.
How BNPL affects credit scores
BNPL services can influence your credit score in various ways, both directly and indirectly. Firstly, some BNPL platforms might conduct a soft credit check when you apply. While this usually doesn’t affect your score, a hard inquiry, which is less common with BNPL, can have a temporary impact.
However, the more significant concern is late or missed payments. Failing to make timely payments with some BNPL services can lead to these delinquencies being reported to credit bureaus, thereby negatively impacting your credit score.
On the other hand, consistently meeting your BNPL payment obligations doesn’t necessarily boost your score, as not all providers report positive payment histories.
Follow these tips for using BNPL responsibly:
- Understand the terms: Before using BNPL, thoroughly read the terms. Know when each payment is due and any potential fees.
- Stay within budget: BNPL loans make it easy to act on impulse purchases. Only buy what you can comfortably afford to repay.
- Set reminders: Ensure timely payments by turning on autopay (if it’s optional), setting calendar alerts, or using apps to remind you of due dates.
- Monitor credit: Periodically check your credit report to ensure BNPL accounts are correctly reported (if they’re reported at all) and to catch any potential errors.
The future of shopping: Buy now, pay later
Buy Now, Pay Later is more than just a shopping trend; it looks like it’s here to stay. As you navigate the digital shopping realm, be aware of its implications on your financial health.
Just because BNPL makes it easy to purchase now doesn’t mean you should overextend yourself. Make sure you can afford the bi-weekly payments.
Remember, BNPL is just one of many options. If you’re considering larger purchases or consolidating debts, perhaps a personal loan is the right choice.
Written by Cassidy Horton | Edited by Rose Wheeler
Cassidy Horton is a finance writer who’s passionate about helping people find financial freedom. With an MBA and a bachelor’s in public relations, her work has been published over a thousand times online by finance brands like Forbes Advisor, The Balance, PayPal, and more. Cassidy is also the founder of Money Hungry Freelancers, a platform that helps freelancers ditch their financial stress.
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