Buy now, pay later: is there a catch?
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In between personal loans and credit cards allow you to spread the cost of a purchase over months rather than paying the full amount at the time of sale. Buy Now, Pay Later is a relatively new addition to your payment options. Online retailers and a variety of vendors offer buy-it-now and pay-after services that allow customers to easily pay for their purchases in regular installments.
Here’s how “buy now, pay later” works and if there’s a catch to using this financing option.
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What is buy now, pay later?
As the name suggests, Buy Now and Pay Later (also known as BNPL) services allow you to buy a product now and pay for it in a series of installments over a short period of time. Similar to layaway, consumers can purchase items as needed and then spread payment for those purchases evenly over a few weeks or months, sometimes without incurring interest costs.
These deferred payment services typically require you to pay part of your purchase upfront (usually 25%), with the balance due in a series of installments. You receive your purchase immediately – just as if you paid for it in cash – but you have to make payments to settle this debt as agreed.
The most popular BNPL providers include Affirm, Afterpay, Klarna and Zip, although Apple and Paypal also offer their own Buy It Now, Pay Later options. Many online stores and in-person retailers offer BNPL services at checkout, making them easy to use for both large and small purchases.
Until recently, BNPL transactions were not reported to regulators such as the top three credit bureaus. However, concerns about the accumulation of consumer debt have prompted the Consumer Financial Protection Bureau (CFPB) to launch a market surveillance investigation asking these companies to start collecting and reporting certain information. In February 2022, credit reporting agency Equifax began allowing BNPL providers to report payments on consumers’ credit reports.
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Should you buy now, use pay later to fund your purchases?
Chances are, you’ll be offered the option to buy now, pay later when shopping from an online retailer, or even check out in a store. But are BNPL services the right choice to fund your next purchase? Consider their pros and cons.
Benefits of Buy Now, Pay Later
- You can pay for large purchases in installments. When you need to make an expensive or unexpected purchase, BNPL gives you the option to buy today and pay over time, even if you can’t afford the entire transaction right away. Unlike layaway, you get the item or service right away.
- It’s not uncommon to see deals with an APR of 0%. Many BNPL services offer reasonable fees and terms, often with no interest on purchases or low interest rates. For many consumers, this can make BNPL cheaper than making purchases with a credit card, especially for those who don’t qualify for a personal loan.
- Your payments could help your credit. Some lenders and retailers have started reporting Buy It Now payments. If this is the case for you, your good payment history could help build your credit score.
Disadvantages of buy now, pay later
- Missed or late payments can cost you a lot of time. If you don’t make your payment on time or miss it altogether, you have to face negative consequences. The BNPL company can charge you hefty late fees, freeze your account to prevent future purchases, or even turn your account over to a collection agency (collections will show up on credit reports).
- Installment payment requirements are set. Buy now, pay later works like an installment loan, where part of the purchase is required up front and the balance is paid back in agreed monthly installments. These arrangements tend to be short-term and you typically make four fixed payments either every two weeks or monthly until you settle the balance.
- BNPL is usually limited to participating retailers. Unlike a credit card, you can only use the Buy It Now Pay Later service at participating retailers. If you want to make a large purchase and BNPL is not available, you will need to find an alternative payment solution.
Some BNPL companies are beginning to offer debit card accounts with built-in installment options. While these give consumers the flexibility to split payment for purchases at each retailer, the purchase limits are tied to your bank account balance – removing the benefit of using BNPL for large or unexpected purchases.
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Credit card vs. buy now, pay later
Buy it now pay later services are similar to credit cards and give you flexibility when shopping. But there are also some important differences to note:
- Both allow you to shop today and pay later. Credit cards and BNPL services make it easy to buy something immediately but pay for the transaction over time. This can come in handy when you have unexpected expenses or need to make a large purchase.
- BNPL must be repaid in a short series of installments. Unlike credit cards, which have a revolving monthly payment based on the remaining balance, BNPL transactions are paid back in set installments. The purchase is broken down into a predictable monthly or bi-weekly payment schedule, similar to a private loan.
- BNPL is only offered through participating merchants. Buy now, pay later is only available at retailers participating in BNPL programs or by applying for certain debit card products at select BNPL companies. Although many retailers are starting to offer BNPL, it still doesn’t offer the same flexibility as credit cards, which are accepted almost everywhere.
- No-interest options may be available. With certain BNPL services, you may be able to avoid interest charges as long as you pay back your purchase within a short period of time. Credit cards also offer this advantage; If you pay your bill balance before the due date, you pay no interest on your credit card transactions. Many credit cards also offer 0% APR deals for new cardholders, which can be used for large purchases and unexpected bills.
If you decide to take out a loan to finance a purchase, Credible makes it easy to do so Compare personal loan rates to find one that suits your needs.