Have you noticed that in recent years, unique payment offers that allow you to “purchase now and pay later” have started to appear throughout the online checkout process? Although larger firms like Paypal, Chase, and even Amazon have started to offer their own buy now, pay later programs, fintech startups like Affirm, Afterpay, Klarna, and Sezzle are among the most popular Buy Now, Pay Later (BNPL) providers available.
The BNPL programs, commonly referred to as “point-of-sale loans,” may appear to be too good to be true at first sight. After all, using a credit card already allows you to make payments over time. What distinguishes the “buy now, pay later” option?
Let’s examine the benefits and drawbacks of BNPL programs to find out more about what they have to offer and to determine whether they would be a good fit for your next online purchase.
Pro: Low to No Interest Offers
The low or even zero percent interest levied on purchases with a buy now, pay later service (as long as they are paid off entirely within a predetermined timeframe) is one of the most obvious advantages. Which alternative would you select, for instance, if you had to decide between making a purchase with your 21 percent APR rewards credit card and a 0 percent BNPL plan with payments neatly divided into equal monthly installments? Choosing the lower/no interest payment plan would be a no-brainer.
Consumers should be aware that not all BNPL services provide 0% interest; this will often rely on the company’s policy, your credit history, and the payback conditions.
Con: Encourages Impulsive Spending
According to a 2021 poll by C+R Research, 59% of respondents have utilized a BNPL service to buy a “unnecessary” item that they wouldn’t have been able to afford otherwise. Clothing, electronics, and furniture were the top three retail categories that consumers from the study used purchase now, pay later programs to pay for. The survey also found that 47 percent of customers use the “buy now, pay later” option when purchasing online either “most” or “all” of the time, and that 10% of consumers reportedly utilize BNPL services at least once per week or more.
Despite the fact that everyone’s online purchasing preferences are different, it is still true that BNPL choices make it simpler than ever to spend money now to obtain what you want and worry about the implications (repayment) later. Due to the psychological benefits of physically paying with cash over using a credit card or BNPL services, persons who are concerned about their finances choose to use cash for the majority of their transactions. Using a “buy now, pay later” program might unleash a bag of worms that, if you’re not careful, could break the bank if impulsive spending is a worry for you.
Pro: Flexible Pay-Off Date Options
If there were just drawbacks to using these services, the “buy now, pay later” schemes wouldn’t have been so popular with customers. They also give customers the option to pay for their goods over a regular period of 2–10 months, or even 1–3 years, depending on the loan’s terms and conditions for repayment, in regular biweekly or monthly payments.
Consumers can more easily calculate their monthly repayment obligations using the BNPL repayment model than they can with credit cards, which can be much more perplexing due to their minimum payment requirements (which are frequently much lower than the total balance), fluctuating interest rates, and statement balances.
Con: Higher Fees
You might be asking how these firms can stay in business when so many of them offer 0% interest on transactions. Here is where the costs are involved. You can incur fines ranging from 20 to 35 percent or more if you don’t pay off your BNPL purchase within the allotted time frame!
It becomes worse since these costs could be charged on the full purchase price, not just the outstanding debt. If there is a chance that you will miss the payment dates, this might quickly render BNPL services not worth the money.
Pro or Con: Unclear Consequences for Your Credit Score
It’s unclear how “buy now, pay later” plans affect customers’ credit ratings. On the one hand, many BNPL businesses use a mild credit pull to see whether you qualify, therefore it shouldn’t have a negative effect on your credit score. If the business informs one of the three main credit agencies about your on-time payments, it may even raise your credit score.
BNPL loans, however, may modify how credit scores are determined in the near future, which might lower your credit score if you have a number of active BNPL accounts and/or you ever default on a payment. For instance, if you use a BNPL service 3-5 times, each of those usages can be recorded as a distinct account with the credit bureaus. Because credit score algorithms strongly include the impact of credit history (number of accounts, average length of credit accounts), this might potentially do quite a bit of damage to your credit score.
The benefits or drawbacks of BNPL services will depend on whether the borrower repays their loan on time and in full when FICO and Vantage update their scoring models to take more “buy now, pay later” loans into account. Currently, there is not a clear positive or negative impact on credit for many consumers.
‘Buy now, pay later’ programs have soared in popularity in recent years due to their 0% interest rates, distinct payback terms, and ability to improve your credit by showcasing a continuous history of on-time payments. Because of this, credit card companies have started to offer their own fixed-installment, pay-over-time schemes, although there are restrictions on this degree of ease. It could be better to avoid BNPL services unless you have a good game plan for repaying them as soon as possible if there’s a chance that you’ll make more impulsive spending selections or that you’ll miss a payment and be punished with a steep penalty.
