In recent years, “buy now, pay later,” or BNPL, services offered by retailers have grown in popularity. With a BNPL payment plan, you can buy something without paying for it in full. Instead, you’ll make a series of fixed payments.
This service is often offered by retailers at checkout through a third party. Generally, BNPL plans don’t come with interest and can be a convenient form of payment.
Keep reading for more insight into what BNPL is and how it works.
BNPL, also known as a point-of-sale loan, involves purchasing something with a series of payments without having to apply for a personal loan. These payments are typically fixed and occur over a set period. It’s fairly common for BNPL purchases to be interest free.
Typically, you would pay 25% of the total cost upfront and then continue with installment payments until the balance is paid off. The most common schedule for these payments is three equal installments every two weeks for a total of six weeks.
You can usually link your purchase to a debit card, bank account, or credit card so you can make automatic payments. In some cases, you may be allowed to mail a check, but that won’t be the most convenient form of payment.
If you fail to make your payments on time you may have to pay a fee. You also risk having to pay interest in the form of a penalty interest rate or deferred interest.
If you do decide to use a BNPL service, you can expect to take the following steps.
1. Check out. First, you need to find a retailer that offers a BNPL payment plan to buy from. You can do this at in-person retail locations and online ones.
2. Sign up for a BNPL plan. If you haven’t used the BNPL service the retailer partners with, you’ll need to register for it.
3. Choose a valid payment form. When signing up for a BNPL service, you’ll link a payment method like a debit or credit card, or your bank account details so you can make your installment payments automatically.
4. Make payments. To avoid fees and interest charges, you need to make your remaining payments on time. Otherwise, your purchase will end up costing you more.
Let’s take a closer look at when it makes sense to use BNPL, and when it may not.
These are some advantages commonly associated with BNPL plans.
It’s worth being aware of some of the disadvantages associated with BNPL.
Using a BNPL service won’t help your credit score in any way, but you do risk harming it. Your payment history isn’t reported to the three main credit bureaus (Experian, TransUnion, and Equifax) so your score won’t improve when you make payments and it won’t necessarily be hurt if you miss a payment.
However, if you don’t complete the full payment schedule on time, you risk the BNPL service sending your debt to a debt collector, who could then report your missed payments to a credit reporting company, which can hurt your credit score. It’s always best to make sure you can afford to make payments before turning to a BNPL plan.
Credit cards and BNPL plans have a lot of similarities, but there are times when it may make more sense to choose one option over the other.
Both options allow you to temporarily borrow money interest free while spreading out the cost of a purchase. And not paying off your balance in full and on time with either option can lead to interest rates and fees. However, it’s easier to qualify for BNPL, as it doesn’t require a credit check like a credit card does.
One of the main advantages credit cards have over BNPL plans is they can offer rewards and the chance to build your credit score. If you want to earn rewards like cash back and travel points or are aiming to boost your credit score by making on-time payments, then a credit card may be a better option.
If you don’t want a credit card or can’t qualify for one, then a BNPL plan can be a solid option for spreading out the cost of a large payment. If you aren’t sure you can make payments on time, BNPLs generally have lower interest rates than credit cards. But again — it’s always best to plan on making payments on time before borrowing money.
A personal loan is another option to consider if you want to cover a big purchase and the options detailed in this article don’t make sense for your situation. However, it’s a good idea to consider the benefits and drawbacks of personal loans too.
Related: Learn more about getting a personal loan