Have you ever bought something expensive and paid for it in installments instead of paying a lump sum? That is called “Buy Now Pay Later”. It’s a marketing scheme, in which retailers allow their customers to buy the product and pay for it over time.
It’s a perfect way to break up your spending and pay for your stuff gradually, which is much better for your cash flow than paying hundreds of dollars in cash for a single-item purchase. While it’s a smart and cost-effective way to pay for your purchases, it is still a form of debt that comes with risk. We’ve explained the BNPL scheme in detail below. Let’s see what it is and how it works.
What Is Buy Now, Pay Later?
It’s an installment loan where the payment for your purchases is divided into equal installments that are to be paid over a specific period. The first amount is paid at the checkout, which is equal to the remaining installments.
The rest of them are deducted from your credit/debit card or bank account automatically at predetermined intervals until the amount for your purchase is paid in full. Most of these plans are interest-free, but depending on the card company and the type of purchase, some of them might include a fee and an interest.
Affirm, PayPal, Sezzle, Afterpay, and Zip are a few popular companies that support the buy now pay later scheme. These installment loans are super convenient and flexible for the customer. It’s highly rewarding for the seller at the same time.
Buying a luxurious item without having to pay the full amount at checkout is quite appealing to shoppers. And with more and more stores adopting this growing trend, shoppers can buy different things and pay for them when it seems convenient.
Buy Now, Pay Later: How Does It Work?
First thing first, you need to confirm with the store owner whether they accept the buy now, pay later payment method. If yes, you will be asked to break your payment into several installments. Instead of paying the full balance immediately, you can clear your dues over time. You will find details regarding the scheme on the checkout screen.
Mostly, it requires your details, like your name, address, preferred payment method, Social Security number, mobile number, date of birth, and other details. The company will conduct a soft credit check to determine your credit score.
Based on the information and your chosen payment option, the company will either accept or decline your request. The selection criteria for this payment scheme may vary by provider, but it usually requires your details. Your credit score may or may not impact your eligibility for this installment loan. Even people with low or no credit history get approved for “buy now, pay later”.
The payment duration also varies from one provider to another, but a majority of them follow the pay-in-four method, where your payments are divided into four equal installments and each installment is paid every two weeks, thus clearing your dues in two months. For instance, if you purchase an item worth $200 through the buy now pay later scheme, your payment will be divided into four installments of $50 each. Your first installment is due immediately, meaning you have to pay $50 at checkout and the rest of them in a period of six weeks.
These payments are interest-free, but if it’s a larger amount, the company may extend your duration to a year or longer and charge interest. The fee for delayed or rescheduled payments can be between $1 and $15. Or, it can be capped at 20-30 percent of the item’s value.
What sets the buy now pay later scheme apart from traditional credit card payments is the APR. if you pay through a credit card, you will incur interest, which is around 3.5% and higher. Even if you have subscribed to a credit card with 0% APR, you will pay interest at some point. That’s one of the many benefits of buying things using the Buy Now Pay Later system.
BNPL requires an autopay system, in which the payment is deducted on the due date automatically from your cards, bank accounts, and other payment methods. Before we proceed, note that not all purchases are approved for the BNPL scheme.
Impact of Buy Now Pay Later on Your Credit Score
Buy Now Pay Later companies perform a soft credit check to ensure that the customer requesting payment through this system is in good financial standing and is credible. Although your credit score doesn’t have much to do with your eligibility for BNPL, some companies may set a desired score below which the installment request is rejected.
The soft credit score check won’t affect your credit score, but they might conduct a hard inquiry, which can deduct a few points from your credit report temporarily. BNPL loans are reported at credit bureaus and they do affect your credit score. Paying the installments on time and in full won’t affect your credit score, but rescheduling the payments can incur late payment fees and may knock some points off your score.
Pros and Cons of Buy Now Pay Later
- You can split up a huge amount into four installments, which can be paid over two-three weeks. This relieves your burden of paying a lump sum for an expensive item.
- It’s easy to apply for the BNPL payment method. Since the scheme doesn’t involve a hard pull, people who do not have a good credit profile will also be eligible for this installment loan.
- No hard inquiry is conducted, so you don’t have to worry about the points getting reduced from your credit score.
- It’s super simple. Whether you are shopping online or at the store, BNPL is a fairly straightforward procedure. You just need to give details as requested and you are good to go!
- No interest. Unlike credit cards and business loans, the BNPL payment plan does not involve interest or fees. You can buy whatever you like and pay for it gradually.
- Good for your Cash Flow. Paying the amount in installments is certainly much better than paying a lump sum, especially when it doesn’t carry any interest.
- Easily available. Buy Now Pay Later has become a common trend and is accepted by a vast majority of retailers. It’s no longer confined to the luxurious stores that sell expensive stuff.
- It can be expensive. While BNPL systems are interest-free, they can charge a sky-high fee if you delay the payment or may incur interest after a few weeks. It’s important to go over the terms of your installment loan before signing up for it.
- A fixed fee. Some BNPL schemes might add a specific fee to your monthly installments, which can make the product more expensive than if you paid the full amount right away.
- Results in overspending. Oftentimes, the high price of a product keeps people from spending too much on an item. But with the buy now pay later scheme, people are tempted to buy a lot of expensive stuff. It doesn’t deduct the payment but gives you more time to clear the amount. At the end of the day, you are overspending on things you would have otherwise avoided.
Alternatives to BNPL
As you can see, the buy now pay later is an excellent payment option for businesses, but it carries some risk. Some companies may consider your credit score or credit history before granting you this installment loan, while others may have a fixed fee or an interest that can make the product more expensive than if you paid the full amount during checkout. In addition to that, BNPL may not work for all purchases. If this method doesn’t seem suitable, here’s what else you can try.
- Credit Card with 0% APR: You can apply for a new credit card, which has 0% introductory APR. This might last from 15 months to 21 months, depending on the credit card company you choose. In addition, these cards offer a welcome bonus, which can get you cashback and other rewards.
- Personal Loans: If you want more time to pay for your purchases, small personal loans could be an ideal choice. Of course, a loan comes with an interest rate, but if you are buying something ridiculously expensive and need considerable time to clear the payment, a personal loan is your best bet.
Buy Now Pay Later is surely a smart way of paying for an expensive purchase over a longer period. Not only helps you maintain your cash flow, but it allows you to buy things you’d have otherwise not bought. But just like credit cards and loans, buy now pay later comes with its share of drawbacks you must be aware of. It makes sense for people that can pay the installments on time. Check with the BNPL company to learn more about the payment scheme, total installments, the duration over which you can pay, and other terms.