Takeaways
- Buy Now, Pay Later apps offer short-term financing on small purchases.
- Buy Now, Pay Later apps finance online purchases with installment payments.
- Buy Now, Pay Later apps were used by ~10% of all shoppers in the last 30 days.
- Buy Now, Pay Later apps charge relatively low fees and interest rates.
- Buy Now, Pay Later services charge lower APRs than alternative forms of short-term financing, such as credit cards or payday loans.
What Is Buy Now, Pay Later (BNPL)?
Buy Now, Pay Later apps and services help consumers make online purchases and pay for them with an installment loan. You often pay for your purchase over four or fewer interest-free (or very low) installment payments.[1]
BNPL has become one of the most popular alternatives to credit cards in recent years, particularly when it comes to online shopping. In a recent survey, roughly 10% of all shoppers used BNPL services in the last 30 days. BNPL services are typically advertised with certain online purchases to help drive sales or offered as a payment option during the online checkout process.
The major attraction to BNPL lies in its convenience and accessibility. Known as "Point-of-Sale Installment Loans" or "Pay-In-4" loans, they let consumers spread the cost of purchases over weeks or months without racking up huge interest charges.[2]
BNPL apps are incredibly attractive to younger consumers and those without access to traditional credit. They provide a flexible payment solution for making purchases without immediate, full payment.
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How Buy Now, Pay Later Works
BNPL services are online point-of-sale installment loans. When you choose BNPL as your payment method during checkout, you must provide basic personal information, like your name, income, and address. From there, BNPL apps often run a soft credit check before extending your credit. It is important to remember that this soft inquiry does not impact your credit score.
If approved, you will make your first installment payment at the time of purchase, which is typically a portion of the total cost. The remaining balance is split into equal installments, and you are usually subscribed to an auto-pay program. These payments are automatically debited from your debit card, credit card, checking account, or savings account.
Installment payments are made automatically according to a predetermined repayment schedule. Most BNPL programs are interest-free (if all payments are made on time). This interest-free period is why consumers have flocked to this payment mechanism. That said, late or missed payments generally incur fees and sometimes interest.
Advantages of Buy Now, Pay Later
BNPL services provide lots of advantages that make them appealing options for consumers. Here are some of the pros:
- No or Low-Interest Charges: Because BNPL apps offer interest-free installment loans, you can spread the purchase cost over time without dealing with high Annual Percentage Rate (APR) interest charges. BNPL services can make budgeting much more manageable and allow you to make purchases when you don't have enough cash. Low-interest charges can be applied if you fail to make your installment purchases on time.
- Streamlined Application: BNPL services have a simplified and straightforward application process with minimal requirements at checkout. Because of this, many consumers, including those who may not qualify for conventional credit, sign up for this payment solution.
- Payment Automation: Another advantage is the ease and convenience of automatic payments, which ensure you can stay on track with your payment schedule. You can link your automated payments to your debit or credit card, removing the need to check your balance and payment timing constantly.
- Online Apps: Almost all the tech-savvy BNPL providers have mobile apps that link to your online account. This means you can manage your balance and track your spending on the go or anywhere with an internet connection.
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Disadvantages of Buy Now, Pay Later
Even though BNPL has some awesome benefits, it also has notable drawbacks. Here are several cons to using BNPY services:
- Debt Accumulation: One of the most significant disadvantages of using BNPL services is the propensity to increase your level of consumer debt. If you don’t regularly monitor your spending or tend to overspend, you could add up charges quickly. You must make payments to avoid incurring late payment fees. These fees can rapidly offset the initial interest-free benefit if they become routine.
- Impact on Credit Score: BNPL programs generally only perform soft credit checks, which don’t affect your credit like a hard inquiry. However, missing installments can impact your credit score if your provider reports them to the credit bureaus. Dings on your credit report can have long-lasting adverse effects on your creditworthiness and ability to get other lines of credit.
- Short Installments: Some BNPL providers also have incredibly short repayment periods, which is not ideal for some consumers. For example, if you link your BNPL automated installment payments to your debit card or savings account, you want to ensure you have enough cash in your savings account to pay the total installment.
- Lack of Cash Savings: Leaning too heavily on BNPL programs can lead to a cycle of short-term debt dependency, making it hard to manage your personal finances. Many finance professionals advocate padding your checking and savings accounts with a slush fund that covers three to six months of living expenses to help offset spontaneous cash needs.
Alternatives to Buy Now, Pay Later
Many alternatives to BNPL can help you manage your purchases and finances effectively. Here are several short-term financing solutions to consider before signing up for a Buy Now, Pay Later installment loan:
- Credit Cards: If you have already signed up for a credit card, you don’t need to necessarily micro-finance a small to mid-size purchase. Instead, you can pay your monthly credit card bill in full, effectively financing your purchase interest-free.
- Debit Cards: While debit cards aren't a short-term financing solution, they allow you to pay for online goods and services with cash. This alleviates the need to repay any debt, and if you have correctly budgeted your finances, it is the best option to avoid interest and fees. Admittedly, debit cards do not offer the same fraud prevention and protection measures as credit cards.
- Personal Loans: If you make large online purchases, consider getting a personal loan. This is especially true if you make multiple purchases to support a project you need to finance, like a home renovation. Personal loans range from $500 to over $50,000 and offer a fixed interest rate and predictable monthly payments.
- Zero Percent APY Credit Cards: Another alternative is to open a 0% APR credit card, which provides an interest-free period of between 6 and 18 months. The key to this approach is not to use too much debt and ensure you can pay off your credit card debt at the end of the zero-interest grace period. Making online purchases with these cards can allow you to repay this loan with no interest.
- Payday Loans: Depending on the timing of your paycheck and when you need to make an online purchase, you could consider a payday loan to help you finance a purchase with a short-term loan. Payday loans are issued in denominations of $500 or less. For larger purchases, you could consider a personal loan.
Smart Summary
Buy Now, Pay Later applications and services allow you to finance online purchases. They usually come in four installments (or less) and charge little to no interest and fees. These installment loans can be attractive for consumers but do add to your consumer debt. Effectively managing your BNPL apps should be integral to your debt management and budgeting system. You can even automate your finances to pay off your installment payments.
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Frequently Asked Questions
Companies use BNPL services to help them offload inventory and streamline the online checkout process to capture a broader base of consumers.
BNPL lenders pay companies for the goods or services purchased from them and assume responsibility for granting credit to you (the consumer) and collecting payment. To compensate BNPL apps for their borrower default risk, merchants discount the purchase price for the good or service. Additionally, BNPL apps earn fees and interest on missed or late payments.
BNPL apps usually have a series of four installment payments to pay off the initial loan.
(1) Consumer Finance Protection Bureau. What is a Buy Now, Pay Later (BNPL) Loan? Last Accessed January 14, 2025.
(2) Office of the Comptroller of the Currency. Retail Lending: Risk Management of ‘Buy Now, Pay Later’ Lending. Last Accessed January 14, 2025.
