Everything You Need to Know About Buy Now, Pay Later Services
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In the last few years, you’ve probably noticed an increase in “buy now, pay later” (BNPL) options for your online purchases.
These services became especially popular during the pandemic, when people started spending more of their money with online retailers. According to a study by The Ascent, more than half of consumers have used a BNPL service.
While these services make it easier to buy more expensive consumer goods and pay them off over time, it’s also easy to lose track of your BNPL purchases and repayments. In fact, 44% of BNPL users say they’ve missed a payment.
So what is BNPL—and what are the risks of using it?
What is buy now, pay later?
Buy now, pay later services are short-term, low- or no-interest credit products that allow people to finance purchases at the point of sale.
You may have noticed an option at checkout for paying off your purchase in installments the last time you went on an online shopping spree; many online retailers partner with BNPL companies to encourage customers to buy more. Some brick-and-mortar stores are starting to offer BNPL as well.
BNPL has become increasingly popular because you can finance everyday purchases easily and quickly, usually with a great introductory interest rate offer. You can use BNPL for everything from concert tickets to hotels, to a new cell phone or that pair of shoes you’ve been eyeing.
How does buy now, pay later work?
In order to decide whether you’re fit to take out their short-term loans, BNPL services run a soft credit check after asking you for a few personal details, such as your SSN and your address.
If approved, you’ll pay off your purchase over an agreed period of time. Because many BNPL services offer low- or no-interest loans, it’s possible that you won’t incur any fees or interest paying off your purchase.
If it sounds like interest-free credit would be a great way for these companies to lose money, you’re right. That’s why many BNPL services rely on missed payments for revenue, as well as merchant fees.
Related Article: A Guide to Everything You Want to Know About Credit
How is buy now, pay later different from credit cards?
Whereas credit cards are a type of revolving credit—that is, you can continuously borrow money as you need it—BNPL acts more like installment credit, where you receive your money up front and pay it off in set installments over time.
Generally, credit cards come with higher interest rates than BNPL loans. But credit cards also allow you to make smaller payments on your purchases—that is, whatever the required minimum payment is on your card—over a longer timeframe. Plus, credit cards often allow you to rack up points or miles on select purchases.
Related Article: 4 Strategic Ways to Use Credit Cards
Pros and cons of buy now, pay later services
- BNPL is a great alternative payment method for people who don’t have credit cards but need to finance a purchase
- BNPL offers low or no interest for on-time payments
- You get a set repayment schedule, so you can budget your repayments out
- BNPL services run a soft credit check, not a hard one, which doesn’t damage your credit score
- Paying for items in installments could enable more impulsive spending and spending beyond your means
- BNPL encourages you to take out credit for any purchase
- Late payments might be subject to high interest rates—often higher than typical credit card rates!
- Repayment terms are usually shorter, with larger installments
- BNPL services don’t report on-time payments to credit bureaus, so you won’t build credit—but they do report late payments
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