What is Buy Now, Pay Later?
When you’re about to make a big purchase, you may have received an offer at checkout to pay in installments. This is what’s known as a “Buy Now, Pay Later” offer (BNPL) and it’s a growing trend among retailers to offer these instant approval point-of-sale loans.
Installment payment plans are nothing new. Retailers like furniture stores have allowed customers to pay off large purchases in installments for decades. Buy now, pay later brings the concept into the digital age by allowing any retailer to offer installment payments for any product, no matter how small, both online and in-store.
These arrangements can be advantageous to both sellers and buyers as the ability to make multiple payments over time can make a purchase seem more appealing to shoppers and result in more sales for the vendors. But using a BNPL offer may not always be a wise move, especially if it encourages spending more than you can afford.
Here’s what you need to know about BNPL.
How Buy Now, Pay Later Works
Using a Buy Now, Pay Later (BNPL) option to spread out payments on a big buy resembles a personal loan in that your payments are split into equal installments over a period of time. These loans are often interest-free as long you make your payments on time and in full. This differs from a traditional credit card purchase which charges you interest for every month you carry a balance.
Advantages of BNPL
Ability to split up your payments. This might make an expensive item more attainable since you don’t have to pony up a lump sum.
There’s no hard credit pull. Unlike applying for a new credit card, BNPLs are easier to qualify for and do not require a hard inquiry. This means that someone who is new to credit or doesn’t have a strong credit profile might find it more appealing to make a purchase this way.
Simple to do. Online shoppers may find the immediate gratification of buying what they want a preferable way to shop.
Can help manage cash flow. A BNPL can help someone buy what they need at a payment plan that fits their budget.
Disadvantages of BNPL
There are some potential pitfalls to be aware of with this type of financing offer.
May encourage overspending. The ability to pay off an item over time can make a purchase seem more affordable. It can be easy to overspend unless you budget for those payments.
They don’t help build credit. If you pay on time, it won’t help your credit. Late payments, however, may be reported and have a negative impact.
Terms may vary. Before committing to a BNPL loan it’s important to understand the terms of the deal. For example, 0% interest may not last the length of the loan, leaving you with expensive finance charges down the line or sky-high penalties if you skip or miss a payment.
Some come with fixed fees. These types of programs add a fixed fee to your monthly payments, which can cost you extra over the life of the loan vs. buying the item outright.
Bottom Line
Buy Now, Pay Later plans can be an effective way to spread out the pain of a large purchase. But before you sign on the dotted line, be sure to take a good look at the exact costs involved. Also be sure you can pay off the loan in time to avoid interest charges and late fees.
*Source: https://www.forbes.com/advisor/credit-cards/buy-now-pay-later/