Buy now, pay later (BNPL) is a type of short-term loan that allows you to pay for something over installments rather than all at once. Your first payment is typically made in a store or online, with additional payments made on a weekly or monthly basis and billed automatically to your debit card, credit card, or bank account. You can take the item home from a store, or have it shipped to you before it’s fully paid for. BNPL loans are popular as an alternative payment option to credit cards or saving up for a major purchase.
How Does Buy Now, Pay Later Work?
Using a buy now, pay later service will require you to fill out an application with personal and financial information, such as your name, date of birth, and Social Security number. The merchant, or whoever handles their buy now pay later plan, will do a “soft pull” of your credit score, which is like a glance at your credit rating and will not affect your credit score.
If approved, you’ll set up a payment plan and divide the total cost of something into weekly or monthly installments. The Consumer Financial Protection Bureau (CFPB) reports that a typical buy now, pay later plan will split the cost of something into four equal installments paid every other week for six weeks. Your first payment would be 25% of the purchase price. A short-term plan usually won’t charge interest, but there could be fees for late or rescheduled payments.
While large retail stores and chains have their own BNPL plans, there are also BNPL apps that you can use to buy something online or in a store. PayPal has a BNPL alternative and BNPL apps such as Affirm, Klarna, and Afterpay are also popular.
How to Use a BNPL Payment App
If you want to use a BNPL app in a store, you may want to contact the merchant to make sure it accepts that form of payment. Many stores do, especially retail chains, but you may want to confirm it either on the phone or online. Do a bit of research online to compare the different BNPL apps and see what they have to offer. Once you’ve made your decision, you can download the BNPL app to your phone and sign up for the service. You’ll have to link a payment method to the app, such as a credit card or bank account.
After that, you have a couple of options depending on the payment app you use:
A One-Time Virtual Card
Obtain a virtual card and add it to your phone’s digital wallet. It works like a prepaid credit card or gift card and would be good for one use only. You may have to specify the amount of money you want to spend when you request the virtual card. You can use your virtual card in a store by opening the card and tapping your phone to the merchant’s contactless payment terminal.
A One-Time QR Code
Similar to a virtual card, you would use your BNPL app to generate a QR code that the cashier scans at the checkout counter.
BNPL Loans Versus Layaway Plans
While often compared to layaway plans, BNPL loans are very different. With a layaway plan, you pay a merchant through regular installments, and you don’t take possession of the item until it’s fully paid for. While layaway plans avoid credit checks, there are often fees involved. BNPL loans are far more common than layaway plans these days.
BNPL Pros and Cons
There are many pros and cons of BNPL loans. For consumers who find it hard to save up for a major purchase, as long as they make their payments on time, a BNPL plan is a short-term loan with no interest costs. It also lets them obtain a loan without a “hard” credit check that would affect their credit score.
On the other hand, missing one payment and falling behind on your BNPL loan could be expensive, resulting in fees and possibly interest payments. Walking away from a BNPL completely, if you can’t keep up with the payments, would likely result in a collection agency coming after you to receive payment, plus additional fees, interest costs, and a drop in your credit score.
Another issue could be your form of payment. Setting up automatic payments from a checking account could result in overdraft penalties if you don’t have enough funds in your account when a payment is due. Automatic payments placed on a credit card could result in you hitting your limit or getting overextended on credit.
BNPL loans can also make it easy for people to overextend themselves. Splitting the cost of something into four payments certainly makes it seem more affordable, especially when you’re standing in line at the checkout counter. Unfortunately, this can encourage overspending. Some people are unable to keep up with the payments, or they take on more than one BNPL at the same time. They then wind up falling further behind from fees and interest costs.
Depending on your BNPL provider, late fees can range from $10 to $30 or more for just one missed payment, according to Consumer Reports. The popularity of buy now, pay later plans has also brought new companies offering larger loans that can take a year or more to pay off.
Short-term BNPL loans, also known as pay-in-4 plans, have no interest charges as long as you make your payments on time. Consumer Reports indicates that longer-term BNPL loans, which could last for several months or a year or more, can charge interest rates of up to 36.99%. Many consumers have signed up for a BNPL, thinking there wouldn’t be interest charges, only to find out later that a high interest rate was lurking within the fine print of their contract. These longer-term plans may also involve a hard check on your credit, which can reduce your FICO credit score for a year or more and remain on your credit reports for two years.
BNPL Vs Credit Cards
The most obvious similarity between BNPL loans and credit cards is that you wouldn’t pay interest on either one as long as you make your BNPL payments on time or pay your credit card off in full each month. Apart from that, there are many differences between BNPL loans and credit cards.
Many people turn to a BNPL plan if they don’t have a credit card, or if they already carry a balance on their credit card and want to avoid the additional interest payments that one more purchase would require. Unfortunately, a scenario like this can often leave someone falling further behind if they can’t keep up with the payments.
One of the biggest differences between BNPL plans and credit cards is that credit cards offer the kind of consumer protections that aren’t available with BNPLs. If you bought something online with a credit card but didn’t receive the item, you could ask your credit card company to halt payment and even refund your money.
Your credit card company could also help you obtain a refund if you cancel an order or return an item that you paid for with a credit card. If you purchase something through a BNPL loan, your return would be with the merchant, but your loan is with the BNPL lender. This can make it difficult and time-consuming to obtain a refund.
The CFPB reports that nearly 14% of BNPL loans had at least some portion of an order that was returned in 2021. Additionally, 4% of people who used a BNPL loan said they had difficulty stopping payments after returning an item, and 5% found it difficult to obtain a refund.
Another key difference between BNPL loans and credit cards is while a short-term BNPL loan is unlikely to affect your credit score, as long as you make the payments on time, it’s also unlikely to help your credit the way a credit card would. If you receive a BNPL loan through a “soft pull” of your credit report, then your loan simply won’t appear on your credit report as long as you keep up with the payments.
With a credit card, your spending and payment history can make up a significant portion of your credit score. Paying your credit card balance off in full each month is a good way to boost your credit score. If your credit card offers rewards on purchases, such as points or travel miles, you would miss out on these benefits as well by choosing a BNPL loan instead.
Using a BNPL loan with a longer timeframe, such as a year or more, could also result in expensive interest-rate charges that could be higher than what you would pay on your credit card. This is why reading the fine print is so important. Make sure you understand the interest charges involved before making an expensive purchase with a credit card or a BNPL loan.
Should You Use Buy Now, Pay Later?
As a community-minded bank, we want to encourage our customers to engage in responsible borrowing and saving. While BNPL loans can be beneficial for some people, there are many things to consider before taking on any type of loan.
For some consumers, a BNPL loan is a rushed decision they make when they realize they don’t have enough in their checking account or in their pocket to make a purchase. Signing up for a BNPL plan is not a decision to make on the spur of the moment. You really need to consider your options before signing up for any kind of loan.
Start by asking yourself if a purchase is really necessary. A computer that you need for work or school could be considered a necessary purchase. A new wardrobe to wear to school should be considered less important.
Make sure you understand all the details of a BNPL loan before you sign your name. Ask about any fees or interest costs involved, and what would happen if you miss a payment. If you already know which retailer you’re going to buy from, find out what kind of BNPL plans they accept and if they have one of their own. From there, you should do a bit of research to find out the pros and cons of each option and make sure you find out what kind of fees or interest charges there could be.
You should also take a close look at your budget and consider your ability to make each payment on time. There are many BNPL payment apps available these days, so you might want to consider a couple of them and do a bit of research. Check out their online reviews and compare their terms before heading to the store.
Consider Your Options Carefully
As with any major purchase or loan application, you should consider your options and take a close look at your budget before applying for any type of loan or credit, including a BNPL loan. You might also consider a personal term loan from West Shore Bank or one of our credit cards. Either of these options can help you build credit when used correctly, and you make your payments on time.
At West Shore Bank, we’ve been locally owned and managed since 1898, so we have a stake in seeing our friends and neighbors succeed. If you need more information or financial advice, please contact us to schedule a free check-in with a West Shore Bank advisor today. You can also visit one of our locations in person and check out our blog for more financial advice.
Important Disclosure
Some products and services discussed in this article—including BNPL providers like PayPal, Affirm, Klarna, and Afterpay—are offered by independent third parties and are not affiliated with West Shore Bank.
Additional charges, enrollment requirements, and terms may apply when using third-party products or mobile apps. By clicking on third-party links, you acknowledge that you are leaving our website. West Shore Bank is not responsible for the content, availability, or security of external sites.
