When you’re shopping this holiday season, you might notice an extra payment option: buy now, pay later. Also known as point-of-sale loans, BNPL services allow customers to buy something online or in a store, take it home, and pay for it over time. A spike in online shopping since the onset of the pandemic has come with growth in BNPL use. But before you use this payment method, it’s a good idea to know how it works and what to look for.
What Is Buy Now, Pay Later?
Buy now, pay later is a type of short-term financing that allows consumers to buy products and spread out payments over time, often with no interest. It’s like a layaway plan with a twist: Instead of receiving your purchase after a series of installment payments, you’ll get the product upfront. Companies that offer buy now, pay later include Klarna, Affirm, Sezzle and PayPal.
[Read: Best Personal Loans.]
How Does BNPL Work?
Your experience with buy now, pay later will vary depending on the company you choose, but here’s what you can generally expect:
— When you’re ready to check out online, you may see an option to break up your purchase over several installments. Or, you can use a BNPL app to pay when shopping in person.
— If you want to use BNPL, you’ll fill out a short application. The BNPL provider may perform a soft credit check, which won’t affect your credit score.
— If you are approved, you may need to make the first payment when you check out.
— The balance is split into a series of installments that are usually due two weeks or a month apart. Terms may vary depending on the payment plan you choose.
— Depending on the BNPL company, you might make automatic payments or be able to pay down your balance online or by mail. Be sure to check the terms and conditions of your loan to see whether there are late fees or other charges.
[READ: Best Bad Credit Loans. ]
What Are the Pros and Cons of Buy Now, Pay Later?
— Often no credit impact when you apply. Buy now, pay later services may perform a soft credit pull — or skip the check altogether — which means your credit won’t be negatively affected.
— May not charge interest or fees. Depending on the BNPL company and the payment plan you choose, you may not pay interest or fees on your purchase.
— Alternative to other forms of credit. This could be beneficial if you want to avoid using your credit cards.
— Extra charges. Some BNPL plans charge interest, and you may be on the hook for late fees if you miss a payment.
— Potential credit impact. You forgo the chance to build positive credit if the BNPL company doesn’t report on-time payments to the credit bureaus. But if the company does report to credit bureaus, late payments can ding your credit score.
— Temptation to spend more. BNPL payment plans can make it easier to buy things you can’t actually afford. In a March 2021 LendingTree survey of American consumers, two-thirds of BNPL shoppers said they spent more than they would have without the buy now, pay later option.
When Should You Choose BNPL?
Generally, “using buy now, pay later for higher-cost items isn’t a bad thing if you have it properly budgeted in and you’re not overusing it,” says Michael James Kelly, a certified financial planner and chartered financial analyst.
BNPL might be a good option for higher-cost items if you had already planned to use your credit card to cover the purchase. When you charge any purchase to your credit card, it takes up a portion of your credit limit and increases your credit utilization, which can lower your credit score. If you use a BNPL plan and put installment payments on your credit card, you’ll use a smaller amount of your credit limit for each payment.
Just make sure you can follow the payment schedule, Kelly says. You can plan this out by checking the payment dates and figuring out whether you’ll have room on your credit card or enough cash in your bank account. It’s also a good idea to have a well-stocked emergency fund that you can dip into if you’re in danger of missing a payment.
There are also good reasons to pay for your purchase all at once with a credit card. Credit cards come with more consumer protections than BNPL plans, and they can also offer benefits such as extended warranties and trip insurance.
A credit card might also be the better option if you qualify for a 0% introductory APR, which often lasts 12 to 18 months from account opening. Instead of signing up for a BNPL installment plan, you could essentially create your own by charging the purchase to your 0% APR credit card and paying it off before the introductory period ends.
Does BNPL Affect Your Credit Score?
Buy now, pay later services are a form of credit, so they may impact your credit score. It depends on the service, the type of payment plan you choose and how you manage the payments.
Applying to use a BNPL service usually won’t affect your credit because most of these companies do not perform a hard credit check.
But as you use the account, the BNPL provider may or may not report information to the credit bureaus. Affirm reports account balances and payment history to Experian for some loans, while Sezzle customers have a choice in the matter, for instance.
Information that’s reported to the credit bureaus can factor into your credit score, so making on-time payments may help you build credit.
Unfortunately, “it’s easier for consumers to spend more than they can afford to when using BNPL platforms,” says Leslie Tayne, a New York-based debt resolution attorney and personal finance expert. In a 2021 Credit Karma/Qualtrics survey, 34% of respondents who used buy now, pay later options said they missed at least one payment. And among those who missed a payment, nearly three-quarters reported seeing a decrease in their credit scores afterward.
But even when you manage payments responsibly, BNPL can ding your credit if each purchase is listed as a separate account on your credit reports, Tayne says. New accounts lower your average age of credit, which can bring down your credit score.
Will You Pay Interest and Fees?
Although BNPL services may tout their loans as low-cost, they can charge interest and fees. Any fees, interest and penalties should be outlined in the terms of the loan, so read the fine print before agreeing to the loan.
Affirm never charges fees but does charge an annual percentage rate between 0% and 30% based on the customer’s credit. Klarna’s short-term plans don’t charge interest, but customers pay an interest rate between 0% and 29.99% on other financing options. Additionally, the company can charge up to 25% of the order’s value in late fees. Afterpay doesn’t charge interest but may also charge late fees worth up to 25% of the order’s value.
Other costs may come into play, too, depending on how you make payments. Your credit card issuer may charge interest if you don’t pay off your balance in full, while your bank may charge an insufficient funds fee if the payment pushes your checking account balance past zero.
Does BNPL Offer Consumer Protections?
Buy now, pay later services lack many consumer protections that come standard with other forms of credit. The Fair Credit Billing Act allows consumers to dispute billing errors with credit card issuers, and credit card holders may also be able to take legal action against the seller and the card issuer if there’s an issue with the quality of a good or a service. However, FCBA protections don’t apply to installment contracts like buy now, pay later.
With BNPL services, you can have a harder time getting a refund when you return an item, for instance. Before using a BNPL service, read and understand the company’s policies.
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