Buy Now, Pay Later is a payment method rapidly becoming a prevalent trend among shoppers. Sometimes called a “Point of Sale” installment loan, BNPL is a short-term financing option that often charges no interest or fee except for missed payments. Why is this payment option becoming so popular? And, is it a wise choice for personal shopping and financial well-being? 

Payment platforms such as Apple Pay Later, Affirm, and PayPal have partnered with retailers to offer BNPL plans during online checkout. Further, many major retailers now accept this form of payment in stores. Each BNPL plan is unique to its provider, but there are several things that all BNPL payment plans have in common:

  • BNPL typically requires an upfront deposit payment that is a portion of the total purchase amount. 
  • Consumers must pay off the remaining BNPL balance in installments over a few weeks or months. 
  • Some BNPL companies lock in the total number of payments, and others allow borrowers to select their payment schedule.
  • Often there is no interest, but this is not always the case. 

How did BNPL become so popular?

BNPL is currently a popular option for both consumers and retailers. A surprising 51% of Americans used a BNPL service at least once in 2020 or 2021. The pandemic was a driving force behind the shift. That trend has continued in 2022. It’s also been a way for consumers without credit cards to access short-term credit. 

There is more competition than ever for consumers’ dollars due to rising inflation, slowing economic growth, and higher interest rates. An increasing number of retailers are jumping on the bandwagon and offering payment options to attract and keep shopping customers. And, with BNPL, consumers often spend more, with some platforms reporting an 85% increase in average orders when using their BNPL plan. 

How is BNPL different from a credit card?

Folks are likely much more familiar with the credit cards they’ve used or have heard about for most of their lives. BNPL may seem indistinguishable. However, they lack the incentive gimmicks adopted by most credit card companies. And BNPL service payment and fee structure can be more straightforward and less pernicious. Here are some other vital differentiators: 

  • Approval is almost instant without a full credit report which lenders and creditors typically use to determine whether to grant an individual credit or a loan. Credit cards usually require a hard credit check to qualify for a credit card. This process can sometimes lower an individual’s credit score, calculated on credit history, debt and other factors. 
  • BNPL plans are paid off in installments, typically with no interest, although some BNPL offerings charge interest. 
  • Credit cards allow purchasers to pay over time at their discretion. Only the monthly minimum is due at each pay period. BNPL payments, on the other hand, are predetermined.
  • Credit cards often offer the opportunity to earn cash back, miles or points or other perks for travel like rental car insurance when making purchases. BNPL services do not. 
  • Late payments on credit card debt can damage an individual’s credit score with both types of purchases. 
  • Credit cards can charge numerous fixed price fees, which add to the overall cost. 
  • A credit card has a set limit against which a purchaser can borrow. As an individual buys items with a credit card, the available amount of credit drops by that amount. You gain more credit as you pay off the debt. BNPL is a one-time, short-term payment agreement. 
  • Credit bureaus always receive reports for any credit card application or an individual’s credit card payment history. BNPL services have the option to report or not, and reporting varies. 

Is BNPL a good option for you?

BNPL financing may be a good option for purchasing large items when you currently do not have enough funds. Life changes such as a move or a new baby can bring increased costs. If you do not have other access to credit or high-interest rate cards, BNPL could work for you. With services that report to credit bureaus, paying on time may even help boost credit scores. 

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However, it is best to weigh whether you need the item now or can wait until you have the full payment saved. Because it is so convenient to use BNPL plans, it’s easy to rack up debt payments beyond your ability to pay. Only use the option if you are confident you can make timely monthly payments. Otherwise, you could damage your credit score and build up large debt balances just as you can with credit cards. And always check interest rates and late fees to understand your agreement’s terms fully. 

The bottom line: Buy now, pay later plans can make it simpler to make purchases while paying them off relatively quickly without incurring interest charges. For individuals who have difficulty getting approved for a traditional credit card, BNPL may be the way to go. Be aware that BNPL loans must be paid back on time to maintain a good credit rating. And don’t throw away your credit card just yet for those merchants who do not accept BNPL.

Finances FYI is presented by 1st Security Bank.

At 1st Security Bank of Washington, we take a customized and personal approach to your financial well-being. We live in the communities we serve, so our branches offer tailored solutions to their communities. We believe relationships make the difference, and that sets 1st Security Bank apart.