August 21, 2023
“Pay later” is an option that’s popping up everywhere, from your favorite shopping app to the card swiper at your favorite retailer. It may be a tempting offer, especially toward the end of the month — but is it a good financial decision?
What Is Buy Now Pay Later?
Buy Now Pay Later (sometimes abbreviated BNPL) is an installment loan offered by many retailers where you agree to buy a product, receive it right away, but pay for it later. Payments are broken into installments, and in many cases you won’t pay interest or fees as long as you make your payments on time.
Third-Party BNPL Servicers vs. Credit Card BNPL Options
Buy Now Pay Later began as a third-party service, but many credit card companies now offer their own pay later options that differ slightly. For one thing, these offers usually appear on your credit card statement instead of being offered at point-of-sale. They may also carry different fee and payment structures than third-party servicers.
Pros and Cons of Buy Now Pay Later
Buy Now Pay Later plans have their advantages, but there are disadvantages to making purchases this way, too. Here are some points to consider.
Advantages of Buy Now Pay Later
Soft Credit Check
Approval for Buy Now Pay Later is easy. Most servicers do a soft credit check that confirms your identity but doesn’t affect your credit score. Even if you have bad credit or no credit, you may still qualify for Buy Now Pay Later.
Aids Cash Flow
Installment plans allow you to break up purchases into small, manageable payments. Payments are usually spaced a few weeks apart, giving you more time to get money together.
Clear Path to Paying Off Debt
You’ll fully pay off your purchase if you make every payment in full and on time. This differs from credit cards, where your balance will grow each month if you make only minimum payments.
Can Be an Inexpensive Use of Credit
Buy Now Pay Later can be an inexpensive way to use credit. Often, you’ll pay 0% interest and no fees on smaller purchases as long as you make your payments. (Note: larger purchases or purchases with longer borrowing terms usually do include interest. The amount will vary depending on the servicer and terms of borrowing.)
Disadvantages of Buy Now Pay Later
Taking On Debt
One of the cons of Buy Now Pay Later is that it involves taking on debt. Debt isn’t always bad, but it does affect your debt-to-income ratio. You could also end up paying a lot more for something by buying it on credit than if you bought it outright.
Easy To Overspend
Buy Now Pay Later is different from other types of credit because unlike with loans and credit cards, there’s no application or waiting period for approval — approval happens as you’re making your purchase. This easy approval can make it easy to overspend. In fact, consumer surveys show that around half of Buy Now Pay Later customers spend 10%-40% more than they would if using a credit card.
High Interest and Fees When Applicable
Although pay later services often don’t charge interest and fees, when they do the interest and fees are high. You’ll be charged interest on any remaining balance if you don’t pay off your debt by the last scheduled payment. You could also incur fees ranging from $1-15 for late, missed, or incomplete payments. For long-term repayment plans, interest can be as high as 36% APR.
Lack of Consumer Protections
Another important consideration is that Buy Now Pay Later plans lack consumer protections offered by credit cards. Credit cards are also more regulated, with laws about underwriting and cost transparency to protect customers. If a product you buy with your credit card never arrives, arrives broken, or has other issues, you can dispute the charge with your card issuer. But with pay later plans, there’s usually no recourse. Similarly, you may be required to continue payments on an item even if you return it.
Pros and Cons of Buy Now Pay Later Plans
Soft credit check won’t affect your credit score
Involves taking on debt
May be eligible with bad or no credit
Easy to overspend
Clear path to paying off debt
Interest and fees are high (when applicable)
Aids cash flow
Expensive for long-term borrowing
Can be an inexpensive use of credit
Lack consumer protections other credit options offer
Buy Now Pay Later’s Impact on Your Credit Score
When you use or repay credit, that activity gets reported to credit bureaus, who record the information in your credit report and use it to calculate your credit score. This includes credit cards, loans, mortgages, student loans, and so on.
As of July 2023, purchases made through most Buy Now Pay Later servicers do not reflect on your credit report unless they are reported to collections for nonpayment. Select pay later services do allow qualifying customers to opt into credit reporting, but that’s not the norm.
However, major credit bureaus are working with pay later servicers to start including Buy Now Pay Later activity in credit reports, so you may start to see this activity show up when you check your credit report annually.
Alternatives to Buy Now Pay Later
Buy Now Pay Later is a new option, but it’s far from the only option. Below are solid alternatives that may work better for you.
Saving to buy something delays gratification, but it also means skipping interest charges, fees, and juggling another debt. Savings accounts are free and great for managing cash flow, but you can also employ certificate saving strategies for long-term goals.
Need to save up quickly? Check out our article 5 Proven Ways to Save Money Fast.
Layaway is a program where you make a deposit on an item and a store holds it until you can make a full purchase. Usually, a full purchase is made through a series of payments like with pay later services, but the advantage is that if you default it won’t reflect on your credit score. You won’t need good credit or have to pay interest or fees either.
A good credit card can be a great alternative to pay later services. Credit cards allow you to spread out the cost of a purchase, and you can avoid paying interest by paying off your card during your billing cycle. Plus, you can earn valuable rewards with your credit card to put toward future purchases.
Personal loans are a flexible, affordable option for borrowing larger amounts of money (usually $1,000 or more). They’re installment loans like Buy Now Pay Later plans, but offer longer repayment terms (usually between 12 and 60 months).
Personal loan interest rates are usually lower than other types of credit. According to Bankrate, as of June 2023, the average personal loan interest rate is 11.05% compared to rates of up to 36% on long-term pay later plans.
Sometimes Buy Now Pay Later is the right tool for the job, but it’s not your only option. The best tool is always the one that fits with your current financial situation and long-term goals.