Is Buy Now, Pay Later a Smarter Way to Shop?

It took several weeks, but you finally found the perfect laptop. There’s only one problem. The price is higher than you’re prepared to spend. A few years ago, you had two options - save up or reach for a credit card. Today, there's a third way. This laptop, and virtually any purchase, can be split into manageable payments without traditional credit card interest or a lengthy loan application.

Where credit cards and loans once dominated, Buy Now, Pay Later (BNPL) offers a flexible middle ground. But this payment option has benefits and drawbacks that should be understood before being used at checkout. 

How does BNPL work?

Many online and in-store retailers present consumers with a BNPL option at checkout. This short-term loan, provided by financial services like Klarna and Affirm, lets you pay part of your purchase upfront and the rest over several weeks or months. Whether you pay interest on the loan depends on the payment plan you choose. For example, with a four-payment plan, you might pay the first installment immediately and the remaining three payments every two weeks over six weeks at zero interest.

Apple® and PayPal®, two major tech companies, recently introduced their versions of BNPL, making it possible to buy high-priced items using a digital wallet or designated app. Apple Pay Later lets you split purchases between $50 and $1,000 into four payments over six weeks without interest. PayPal offers two options: “Pay in 4” for smaller purchases and “Pay Monthly” for amounts up to $10,000, which may include interest charges based on loan terms. 

Benefits of BNPL

BNPL removes common barriers faced by consumers who might be denied a traditional loan. More specifically, users experience:

• Minimal credit requirements. Some services do not run a credit check, but those that do perform a soft credit inquiry and provide instant approval. This action does not impact your credit utilization rate, leaving traditional credit lines available for other needs.
• Simple financing. Unlike credit cards, which can add compounding interest to unpaid balances, many BNPL services charge no interest when you pay on time. You’ll know the total payment obligation from the start without worrying about variable interest rates or hidden fees.

Drawbacks of BNPL

Although BNPL offers certain benefits, some aspects might actually hinder your long-term financial goals. Selecting this repayment option might also result in the following:

• Inconsistent credit reporting. BNPL credit reporting works differently from traditional loans. On-time payments rarely improve your credit score, but missed payments can damage it, resulting in an imbalance in credit-building opportunities. However, the exact impact on your credit will depend on the service you use.
• More frequent payments. Payments every two weeks require more frequent financial planning than credit cards. This shorter payment cycle might be challenging if you only receive a paycheck once or twice a month.
• Payment overwhelm. If you decide to use multiple BNPL services, you might need to sharpen your money management skills. Quick approvals can lead to overlapping payment plans, potentially straining your budget.
• Higher interest rates. While repayment plans with no upfront fees and zero interest exist, some plans come with a 36% APR, which is higher than most credit cards. Even no interest plans can cost you. Some may impose late fees or other penalties if you miss payments, increasing the total cost.
• Overspending. BNPL lets you acquire goods or services without paying the full amount upfront. This can lead to purchasing items on impulse rather than as a result of careful consideration.

If you decide to use BNPL to make purchases, it’s vital to do so responsibly. Otherwise, you might not enjoy the full benefits of this flexible payment option.

Tips for Effective BNPL Usage

Use these tips to maximize benefits and minimize risks.

• Set limits. Consider placing a cap on BNPL spending to equal 10% (or less) of your disposable income. Establish a maximum number of concurrent plans based on your income stability and existing financial obligations.
• Monitor BNPL commitments. Develop a reliable system for tracking payment due dates. Set multiple reminders and maintain a minimum account balance equal to one payment cycle to cover each short-term loan.

BNPL services offer a flexible way to make purchases through installment payments, but they require careful consideration of your current budget and future financial goals. Since service provider terms vary, it’s wise to compare payment schedules, interest rates, and fees to ensure you use these services responsibly.