If you’ve ever purchased a big ticket item like a Peloton bike or everyday items like shoes and clothing, you’ve probably used a Buy Now Pay Later (BNPL) service to cover the costs at least once. In recent years, BPNL services have grown in popularity, revolutionizing how consumers shop and pay for goods. According to a report by the CFPB in September 2022, the number of BNPL loans originating in the U.S. increased from 16.8 million in 2019 to 180 million in 2021.
With platforms like Afterpay and Klarna gaining traction while inflation continues to rise, it’s important to understand the pros and cons associated with these services. In this article, we’ll delve into the advantages and disadvantages of Buy Now Pay Later services so you can make more informed decisions about your everyday purchases.
What is Buy Now Pay Later?
Buy Now Pay Later is a payment option that allows you to purchase items and pay for them in installments over time. It’s like having a virtual layaway plan without waiting until you fully pay off the item before receiving it. With BNPL, you can enjoy the immediate gratification of your purchase while spreading out the cost with zero interest in many cases.
Some of the most common buy now pay later services include:
- Affirm
- Afterpay
- Klarna
- PayPal
- Apple Pay Later
- Zip
- Zezzle
How Does Buy Now Pay Later Work?
You can use Buy Now Pay Later while shopping online or in a mobile app with a participating retailer. You’ll have the option to choose BNPL at the checkout. Once you select BNPL and get approved, you typically make a small down payment, often around 25% of the total purchase amount. In some cases, there is no down payment at all. This depends on your creditworthiness and the amount of the purchase. The remaining amount is divided into interest-free installments, which you’ll pay off over several weeks or months. These installments come with predetermined payment amounts that are consistent throughout the repayment period. Unlike traditional credit cards, BNPL apps usually don’t charge interest.
Pros and Cons of Buy Now Pay Later Services
Now that you know what Buy Now Pay Later is and how it works let’s explore some of the pros and cons below:
Pros:
- Interest-Free: Although some providers require interest, many BNPL services offer interest-free payments, making it cost-effective for short-term financing.
- Budget-Friendly: Fixed payment amounts help you manage your budget more effectively.
- Convenience: BNPL is readily available at various retailers and can be easily accessed through mobile apps and online.
- Approval: It’s typically easier to get approved for BNPL than traditional credit cards, making it more easily accessible to consumers. They also use a soft credit pull to assess your creditworthiness so it won’t affect your credit if you apply.
Cons:
- Limited Credit Building: On-time payments for BNPL transactions are not reported to the three main credit bureaus, limiting your ability to build or improve your credit score.
- Impulse Spending: The ease of BNPL can lead to impulse buying and overspending, and you can easily find yourself with multiple loans at once.
- Late Fees: Missing payments can result in late fees, increasing the overall cost of the item you purchased.
- Debt Accumulation: Frequent use of BNPL may lead to accumulating debt if not managed responsibly.
- Limited Retailers: Not all retailers offer BNPL options, which sometimes limits your choices.
The Bottom Line
The convenience and flexibility of Buy Now Pay Later services can make managing your payments and budgeting for your favorite items easier. However, it’s also important to be mindful of the potential pitfalls, like overspending and the risk of accumulating debt due to missed payments or hidden fees. Like any financial tool, you should utilize BNPL services responsibly to avoid any negative consequences.
Sources:
https://www.investopedia.com/buy-now-pay-later-5182291
https://www.nerdwallet.com/article/loans/personal-loans/buy-now-pay-later
