What Is Buy Now, Pay Later (BNPL)?
Buy now, pay later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them over time. BNPL is also commonly known as a point-of-sale (POS) installment loan that doesn't charge interest. Using BNPL financing can be convenient, but there are also some potential traps to consider. Consumers can make purchases using BNPL services offered by traditional and online retailers or through apps provided by third-parties.
Key Takeaways
- Buy now, pay later is a type of short-term financing.
- Consumers can make purchases and pay for them over time after an up-front payment.
- Buy now, pay later plans typically charge no interest.
- Compared to traditional credit cards and personal loans, BNPL loans are fairly easy for consumers to get approved for.
- BNPL generally won’t affect your credit score unless you make late payments or fail to pay.
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How Buy Now, Pay Later (BNPL) Works
Buy now, pay later programs have different terms and conditions. They generally offer short-term loans with fixed payments, no interest, and no additional charges. This means you know your payment amounts up front, and each payment will be the same. You can use a BNPL app to make the purchase, or you may have BNPL options through your credit card.
With BNPL, you can make a purchase at a participating retailer and opt for buy now, pay later at checkout. If approved, you make a small down payment, such as 25% of the overall purchase amount. You then pay off the remaining amount in a series of interest-free installments, usually over a few weeks or months.
Payments can be deducted automatically from your debit card, bank account, or credit card. You may also be able to pay via check or bank transfer in some cases, although the Consumer Financial Protection Bureau (CFPB) says that most BNPL lenders give consumers no choice other than autopay.
The main difference between using BNPL and a credit card is that the credit card generally charges interest on any balance carried over to the next billing cycle. Although some credit cards offer 0% annual percentage rates (APRs), it may only be for a limited time. With a credit card, you can carry a balance or use your credit line indefinitely.
Some purchases may not be eligible for buy-now-pay-later financing. Also, there are limits on the amount that you can finance this way.
Buy Now, Pay Later (BNPL) Trends
BNPL is a payment option you may see more now than you did in the earlier 2000s. During economic times when inflation is high and interest rates rise, BNPL may be a helpful option for people making purchases.
A September 2022 report from the CFPB found that from 2019 to 2021, the number of BNPL loans originated in the U.S. by the five lenders it surveyed grew from 16.8 million to 180 million. This kind of financing was once most popular for beauty and apparel purchases, but it has branched out into other areas like travel, pet care, groceries, and gas. Most BNPL loans range from $50 to $1,000. The CFPB's research showed that the average loan was $135 over six weeks.
Companies, such as Affirm and Klarna, offer buy-now-pay-later financing on purchases at participating retailers. Some credit card issuers, such as Chase and American Express, have also set up similar financing arrangements.
Another CFPB report from March 2023 found that:
- Users of buy-now-pay-later services were far more likely to have bank overdrafts, payday loans, pawn loans, and other high-interest financial products, indicating that they are more financially vulnerable than non-users of BNPL financing
- Black, Hispanic, and female consumers were more likely than average to use it, as were consumers with household incomes between $20,000 and $50,000
While BNPL can help you make purchases you wouldn't otherwise be able to make at that time, if you're not careful, you could put yourself into a situation where you have more debt than you can afford. And that can impact your credit.
Walmart-backed One Finance announced plans to offer BNPL financing to the retailer's customers in 2023. The service hasn't started yet as the company continues to use Affirm.
How Buy Now, Pay Later (BNPL) Affects Your Credit
Most buy-now-pay-later companies only require a soft credit check for approval, which doesn’t affect your credit score. However, others may conduct a hard pull of your credit file, which could knock a few points off your score temporarily.
BNPL loans are only reported to one or more of thethree major credit bureaus for late payments or nonpayments and could show up on your credit reports and have an impact on your credit score.
It's important to ensure that you can pay the monthly installments after you agree to the BNPL loan. If you do not pay your monthly payment for the BNPL loan, you could become delinquent on it and your credit history, report, and score could all be negatively impacted.
The CFPB found that those who used BNPL loans often had delinquencies on their other credit lines. These users also tended to have lower credit scores.
Since a BNPL loan is not reported to a credit bureau, it won’t help you build a good credit history like a credit card would.
Risks of Using Buy Now, Pay Later (BNPL) Apps
There are some risks to consider before entering into a BNPL arrangement.
First, you’ll want to understand the repayment terms to which you’re agreeing because BNPL financing is not as closely regulated as credit cards are. Terms can vary significantly. For example, some companies may require you to pay the remaining balance with biweekly payments over a month-long period. Others may give you three months, six months, or even longer to pay off your purchases.
Understanding how your payments will work can help you plan for them in your budget. This ensures that you can afford your payments and make them on time. Missing a payment for a buy-now-pay-later agreement could result in late fees. Your late payment history could also be reported to the credit bureaus, which could hurt your credit score.
Finally, consider store return policies and how BNPL loans might affect your ability to return something that you’ve purchased. For example, a merchant may allow you to return the item, but you might not be able to cancel the buy now, pay later arrangement until you can provide proof that the return has been accepted and processed.
Advantages and Disadvantages of Buy Now, Pay Later (BNPL)
Advantages
As mentioned, buy-now-pay-later financing agreements allow consumers to pay for things over time without interest charges. And it’s possible to get approved for this type of financing even if you’ve been shut out of other loan options due to a low credit score or the lack of credit history.
BNPL loans don’t add to your credit card debt, but they do add to your personal loan debt. They don’t usually affect your credit score unless you fail to pay.
Disadvantages
BNPL does come with certain downsides. For instance, paying off a BNPL loan generally won’t help you establish and build good credit, either. You also miss out on any perks that credit cards offer, such as cash-back or rewards points.
Also, if you want to return an item you bought via BNPL, it can get complicated. You should get your money back, but there can be a delay until the merchant informs the BNPL lender of the refund. You may have to keep making payments in the meantime. If you don’t, then the payment might be marked tardy or missing, resulting in added fees and a possible ding to your credit score.
Pros
Convenient way to pay for purchases over time
Frequently no interest or lower interest rates than credit cards
Good credit/high credit score not necessary to qualify
Fast approval
Cons
Payments can be hard to track
Missing or late payments result in late fees and may damage credit score
No rewards or cash back earned on purchases
Payments may continue even if item is returned
Teaching Teens About Buy Now, Pay Later (BNPL)
If you have a teenager in your life, there's a good chance they've seen buy now, pay later as an option when online shopping. It's important to explain to them how it works so they know the risks associated with installment loans.
Most BNPL loans require the borrower to be at least 18 years old. And even if they are that age, they could be denied and need someone who has a strong credit history and good credit score to apply for the BNPL financing. So if your teen is under 18, they likely won't be able to use a BNPL loan to purchase something on their own.
BNPL may be easy and fast to use for purchase, but it may not be the best way to go about buying that item. For example, if a teen wants to buy a $100 jacket, BNPL may break down the cost of the jacket into four installments of $25, but the teen could also work to save up the $100 and then buy the jacket outright. The latter approach would help teach the teen about saving and budgeting their money. By the time they save up $100, the teen may not even want to spend it on the jacket anymore.
On the flip side, BNPL could help teach a teen about paying monthly bills. If you agree to purchase the jacket with BNPL financing, you could require the teen to pay you $25 every month until it's paid off. There's still the chance that the teen doesn't pay you back, but it could be a good learning opportunity for them.
If your teen is old enough to use BNPL financing, make sure they know how it could impact their credit history, report, and score. Take the time to explain debt and the best ways to manage it, as well as how credit impacts teens and why it's important for their financial future.
What Credit Score Do You Need for a Buy Now, Pay Later (BNPL) Plan?
There is no set credit score required for signing up for a BNPL plan. In fact, some providers of the service won’t even check your credit score or credit reports when you apply. Some run a soft credit check to understand your creditworthiness.
What Are the Dollar Limits on BNPL Loans?
That also varies from provider to provider, and from retailer to retailer. In general, it may range from hundreds to thousands of dollars. Along with an overall limit, some plans set a per-purchase limit. That is worth checking out before you head to the store to buy a big-ticket item.
What Is the Interest Rate on a BNPL Loan?
Most plans charge 0% interest as long as you make your payments on time. However, if you fail to do so, interest rates can range up to 36%. The plans may also charge late fees, typically $7 or $8, according to the Consumer Financial Protection Bureau.
The Bottom Line
Buy now, pay later loans can let you make purchases immediately but pay them off over time with no interest. If you’re considering using a BNPL plan, be sure that you understand the terms and conditions, and that you’ll be able to make all the payments on time. Consider whether the payments are affordable and what penalties you may face if you’re unable to pay. Before you decide, it’s worth weighing the pros and cons of BNPL against other options, such as credit cards and personal loans.
