Have you seen “buy now, pay later” icons as you shop online? Has your credit card issuer asked you if you want to divide a big purchase interest-free over multiple months? Have you been wondering what the benefits and drawbacks are to these arrangements? Here’s where to start with this relatively new credit option.
As is often the case in the world of personal finance, the “buy now, pay later” approach to making purchases isn’t universally good or bad. It’s a financing tool that can be used well—which is to say, to your benefit with minimal or no risk—or it can be misused.
You can quickly be approved for buy now, pay later (BNPL) financing, and in many cases, it will be a smart choice for you to divide payments over time. But, like any form of credit, you should still understand these ins and outs of how it works before you start using it.
What Is Buy Now, Pay Later?
At its simplest, BNPL is an option for the short-term financing of purchases.
This form of credit is often used by retailers to help consumers buy small to medium-sized ticket items, such as clothing, electronics, furniture and appliances. If you want to buy concert tickets today but want to pay for them over the next few months, you might use BNPL, which is available as a purchase option on many websites and is also offered by online and traditional financial institutions. Instead of paying with cash or your debit card or credit card, BNPL options allow you to sign up for a set of monthly interest-free deferred payments. Usually you are approved on the spot, either in-store or on the website where you are making the purchase.
If you want to spend $400 on an appliance or piece of furniture, for example, with the help of BNPL financing, you might break the cost into four $100 payments or installments. The first installment would be made at the point of sale, and the remaining payments would typically be deducted automatically from your bank account at set dates in the future.
If you have the money available when your payments are due, no problem. It’s a no-brainer to ease your budget by spreading a large purchase out over time. BNPL options also generally offer an interest-free period, which means that you will just pay back the exact purchase price. Payment terms will be established up front and could be monthly, weekly or even biweekly, so budgeting ahead of time for the installments will be crucial.
If something happens and you don’t have the funds to cover your installment payments, you could end up paying late fees. And if you fail to pay off your balance by the end of the interest-free period, you could face interest charges.
When Should I Use Buy Now, Pay Later?
Perhaps you have the money available for the purchase, but you prefer a small interest-free loan that you know you’ll pay the installments on time. Maybe you don’t have the cash available on the date of purchase, but you’re confident that you’ll be able to make those few additional payments. In either case, there’s little risk of negative consequences. So it’s about your personal payment preference and how you manage your monthly finances and cash flow.
Credit bureaus (those agencies that track your credit) are still working on the best way to track and categorize BNPL loans. Most BNPL services will do what’s called a soft credit inquiry where they review your creditworthiness in a way that it doesn’t impact your credit reports. The cursory inquiry can be done almost instantly with minimal information from you. If the BNPL option you are considering does a hard inquiry of your credit reports, remember that it will show up on the inquiries section of your credit reports for two years.
The ease of receiving approval for BNPL purchases makes them so convenient that it can be hard to say no to the option. For that reason, some people find themselves with a variety of these payments due each month. If you have multiple BNPL loans, be sure to keep track of them as a part of your larger budget. As with any purchases, don’t spend beyond your means.
If you don’t keep up with what is due, you might find yourself with some surprises. In addition to fees and interest payments, BNPLs could also potentially damage your credit scores.
One Tool in Your Toolbox
Remember that BNPL options are just one of a number of payment options and can be a smart tool in your personal finance toolbox.
For some people, simply paying upfront with a debit card is the easiest option. For others, credit cards are the best option because if you pay off your credit card balance every month, you are essentially taking out an interest-free loan like a BNPL from your credit card issuer. Not only that, but credit cards can also gradually build your credit history in a way that BNPL loans won’t, and credit cards typically come with perks, such as receiving cash back or earning points or miles. If you don’t have a credit card, if your credit scores need work before a major financial goal you’re planning or if you just want a convenient way to split up payments, a BNPL loan might work best for you.
The best advice is to know your habits as a consumer and use the payment method that gives you the greatest benefit with the least exposure to risk. Always take the time to think about your options and don’t feel pressured to sign up for something that doesn’t seem right for you.
Allan Kunigis is a financial freelance writer based in Shelburne, VT. He has written about personal finance for more than two decades.
Illustration by Sergio Membrillas.
In considering the best-fitting financing option, it’s important to do your research on BNPL. To help with weighing options, consider doing a spending analysis to determine whether or not you can afford to make a purchase in cash or if the BNPL financing option can work for you and your budget.