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The Pros And Cons of Buy Now Pay Later
You’re browsing your favorite online retailers when you spot an item that really appeals to you. There’s only one problem—the price tag shows $75, which is a bit more money than you’re ready to spend. But you notice that you also have the option of purchasing the item and paying in installments—and three payments of $25, or five payments of $15, suddenly seems much more reasonable. If this scenario sounds familiar to you, then you’ve encountered the “Buy Now, Pay Later” option. So what is Buy Now, Pay Later (BNPL)? For starters, it’s a short-term loan that allows shoppers to divide payments over time. BNPL is sometimes confused with layaway, a payment option where shoppers make a down payment on an item, and receive it once they’ve paid it off in installments.
The BNPL trend has skyrocketed in recent years as more commerce takes place on the internet. In fact, the Consumer Financial Protection Bureau (CFPB) surveyed five BNPL service providers in 2022, and found that the number of loans had soared from 16.8 million in 2019 to 180 million in 2021.
It’s popular for a reason, but there are also legitimate concerns with BNPL. Let’s break down the pros and cons, so you can decide when—and if—it’s the right option for you.
The Pros
So why is Buy Now, Pay Later so popular? When you want to make a purchase but the product is too expensive, you have to wait until you’ve saved up enough money or you have to break your budget. BNPL provides a useful alternative, to buy what you want and factor it responsibly into the weekly or monthly allocation of your funds.
Unlike traditional credit options, people with a limited credit history can use BNPL. In most cases, there’s no credit score requirement when signing up for BNPL and minimal personal information is collected—which is why it’s a popular option among Gen Z.
Normally, when you pay for a purchase in installments, interest will accrue, so the cost slowly increases over time. But a typical BNPL plan starts with an interest-free period, and you won’t face additional costs unless you fall behind on payments. BNPL can enhance your customer experience by letting you decide when you want to pay, so you can enjoy obstacle-free online shopping. But that can also create problems, as we’ll explore next.
The Cons
1. Don’t Compromise Your Credit Score
You might be unaware that BNPL can negatively affect your credit score. While your timely payments won’t be reported to any of the three major credit bureaus, missed payments and defaults will be—and this will negatively impact your credit score, credit report, and credit history. It’s also worth noting that your credit score can be temporarily reduced if a BNPL company conducts a hard pull of your credit file, though most will only do a soft credit check.
2. Watch Your Spending
When expensive items suddenly seem cheap, there’s a real risk of overspending—and because refunds for BNPL purchases require you to deal with both the retailer and a third-party lender, trying to reverse a regretted purchase can cause a huge headache. As always, it’s important to respect your budget and set reasonable spending limits.
3. Beware of Fees and Interest Charges
If you miss a payment, what’s the penalty? Well, it depends on the retailer and BNPL service. According to the CFPB, late fees are usually between $7 and $8. And while it’s common for these plans to charge 0% interest upfront, the interest-free period may run out after a set amount of time, or interest can be charged on delayed payments—in some cases, with rates as high as 36%.
4. You’ll Lose Out on Rewards
When you pay with a credit card or debit card with a rewards checking account, you receive small bonuses that can add up to big benefits over time, such as points or cash-back. Not so with BNPL—and you’re also not doing anything to build solid credit.
Always Put Your Financial Wellbeing First
When used responsibly, BNPL is a great way to make high-priority purchases, but it can add to your debt and subtract from your credit score. Use it when you need to, read the terms and conditions, and always keep your personal budget and financial goals in sight.
See more simple ways to manage your spending.
KEEP READINGThe Basics of BNPL
If you've shopped online recently, you've probably seen options at checkout to divide your purchase into multiple, smaller payments. There are a few well-known vendors that help retailers offer this service, but what does it really mean and how can it affect your credit score? Each option is a bit different, but our Loan Product Manager, John Egan, explains the basic pros and cons.
