Found the perfect chainsaw, cat apartment or a lounge chair, but you don’t have enough money to cover the total cost? After a quick application without firm credit checkBuy Now Pay Later (BNPL) services allow you to spread the price of your item over a period of time, often six weeks with a total of four payments.
Whether you call them installment plans, payout plans, or layaway programs, BNPL services have been used in markets around the world to centuries. But never have they been so quick and easy as today smartphone apps.
Companies like PayPalAmazon, Affirm, Klarna, Afterpay and Apple are investing heavily in BNPL, while credit card providers fill short-term funding gaps with their own BNPL services. And clients love BNPL, spending $120 billion through these programs in 2021, by GlobalData.
According to Paul McAdam, Senior Director of Banking Intelligence and Payments at JD Power, “Customers like BNPL because it helps them pay for things over time, they like the ease of buying and paying, and in Overall, they find the loan and repayment terms easy to understand.”
But credit cards do the same thing, don’t they? Well yes. And no. Credit cards and the BNPL offer you goods and services (think hair salons or tattoo parlors) now that you pay later, but there are big differences between the two. Learn about the two main methods of short-term financing for purchases and how to choose the one that’s right for you.
How do Buy Now, Pay Later services work?
Buy now, pay later offer customers the same basic functionality as credit cards – easy cashless payments – but they generally eliminate fees and interest in exchange for an agreement that you will repay the loan within a very short period of time, usually six weeks . You will also typically need to make payment from a debit or credit card at the time of purchase.
Although the customer receives free financing, the merchant pays for this sale, usually 4% to 9.5% of the purchase price, by NPR. This statistic then leads to the big question about BNPL: why would companies pay such high rates to make sales? (And do companies include these costs in inflated prices?)
“Overspending, overspending, overspending,” says Todd Christensen, education manager at Money adjustment, a non-profit debt relief program. “Whenever retailers make the buying process more convenient for the consumer, consumers spend more money. It’s human nature.”
The approval process for BNPL is quick and easy, with no credit checks and an up-front explanation of payment amounts and due dates. For online purchases, the BNPL application will generally be integrated into your shopping cart. For in-store purchases, you’ll probably need to have an BNPL accepted app installed on your smartphone (although I’m sure any willing seller will be patient while you install it).
Most BNPL services use four payments over six weeks, while Amazon divides it into five installments over four months.
The problem? A big detail is that BNPL is all down and not up for your credit score. Whereas missed payments and accounts in default will reduce your score, you will not get any credit for your on-time payments.
“The credit bureaus are preparing for such reports, although BNPL accounts will require some kind of standardization to make the data meaningful,” according to Martin Lynch, director of education for Cambridge Credit Counseling.
In addition, BNPL companies could charge late fees if you miss payments and take your debts to collection agencies after long periods without payment.
How are credit cards different from buy now, pay later?
Technically, credit cards have the equivalent of BNPL functionality mandated by US federal law. All purchases included at the end of your statement period receive a Grace period at least 21 days before you are due to make a payment.
This means you get the built-in BNPL for free for at least three weeks, which is half the usual duration of the BNPL. If you make your purchase at the very beginning of your monthly statement period, you could get over seven weeks of interest-free financing, with payment not due until the end.
After that, however, interest arrives on credit cards. If you don’t pay off your balance in full after this grace period, your annual percentage rate (APR) will start adding interest to your debt. The average credit card APR on July 1 is 16.13%, compared to The bank ratethat’s about $15 interest per month on a balance of $1,000.
Credit cards with 0% introductory APR periods are a big exception that can often trump BNPL options. These cards let you spend up to your credit limit interest-free for six to 21 months if you make your minimum payments.
Lynch notes that “0% cards are still the best option if you only need to make a few purchases, but they’re also limited because the promotional period will eventually end.”
One of the benefits of credit cards is that all of your purchases are tracked in one place. Each online or physical retail store will likely accept your credit card, while each may have a different BNPL accepted service. Would you rather have four different accounts with four different payment plans, or one payment per month that adds potential interest risk when carrying a balance?
Finally, credit cards offer buy protection and rewards for expenses that BNPL services typically do not. Rewards card point junkies who pay their balances monthly will likely want to keep working on their repayment instead of opening separate BNPL accounts.
Credit cards and banks have their own buy-it-now and pay-later services
To complicate matters further, credit card companies are beginning to launch their own buy-it-now, pay-later services. My hunting planAmerican Express’ plan itand MasterCard payments are probably the only startup of BNPL credit card services.
Lynch says credit card companies have generally done a good job of mimicking the BNPL model while preserving some of the benefits of a traditional credit card. BNPL purchases with credit cards often retain the same rewards as regular credit card purchases, and shoppers retain the same purchase protections.
The wrong side? According to Todd Christensen, “Any debt on a BNPL credit card service will affect the consumer’s credit card balance.” This means that you will have less room to spend on your credit card and your credit ratio will increase, which will lower your credit score slightly.
BNPL credit card services may also offer a wider range of repayment options. There may be fees or interest charged for longer payment terms. Either way, it’s worth researching your own credit card provider’s options before buying with a new service.
How do I choose between a credit card or buy now, pay later?
As usual, the decision to use a BNPL service or your credit card for a purchase depends on your personal circumstances, the amount of your purchase, your credit history and how you normally use your credit cards. .
For those struggling to organize multiple accounts, a credit card might be a better option than BNPL – all your purchases and payments are tracked in one account. Depending on your credit limit, credit cards will generally give you a bit more purchasing power to bigger ticketsand they can provide purchase protection and rewards on your spending.
On the other hand, of course, not everyone can be approved for a credit card, and BNPL services can provide financing options for customers who didn’t have one before. BNPL services offer wider accessibility and detailed information on exact payments for your specific purchases.
If you can’t make your credit card payments, watch out for late fees and penalties. BNPL plans may charge neither or have much lower costs. Affirm does not charge any late feeswhile Klarna and Afterpay charge significantly less than most credit cards – Postpay fee up to $8 (and no more than 25% of the purchase), while several Klarna affiliates list late fees which cap at $7. Credit cards in 2022 have an average late fee of $30, according to CreditCards.com.
No credit check is required for BNPL services, and you’ll see your exact payment amount and repayment schedule for your purchase up front. Also, conventional bi-weekly payments can align well with your pay periods.
However, there are a few drawbacks. Every BNPL purchase requires an application, and although most are quickly approved, there is always the uncertainty that you will not be able to complete your transaction. If you have space on your credit card, you are completely guaranteed that your purchase will be completed.
You will also need to track all of your BNPL purchases separately, potentially with multiple accounts.
According to Martin Lynch, “The greatest risk [of BNPL] has to do with the consumer’s ability to stay organized and disciplined. BNPL users reported losing track of which BNPL contracts they actually entered into, while a fairly high percentage reported falling behind on their installments and incurring fees and a negative impact on credit rating.”
Todd Christensen agrees. “About 1.73% of credit card company debt is overdue by 30 days or more. [a leading BNPL provider] sees its 30+ day overdue debt hit double those stats at 3.7%.”
As Lynch points out, even if you repay your BNPL debts on time and in full, you will not benefit from your due diligence on your credit report. BNPL debt can only hurt your credit score, not help it.