The buy-now-pay-later (BNPL) space helps consumers afford large purchases. In fact, recent research suggests that 45% of BNPL users surveyed do so because it’s easier to make payments, with 44% using this technology because of its flexibility.
BNPL is another tool that merchants can offer to customers to help them pay the way that works best for them. However, there are advantages (and disadvantages) to using BNPL. For some, these tools may offer lower interest rates than credit cards or loans. For others, the easy (and often immediate) approval process is key. This means it’s important to know how BNPL works, when it’s an ideal payment option, and how it impacts your overall financial health.
Know how to use it
BNPL is a relative newcomer to the e-commerce space, potentially providing consumers with a different way to pay for big purchases that’s different from credit cards. Some may not know how BNPL differs from credit cards or other financing options, which makes it important to establish the core features and differentiators of this purchasing method versus others like it.
When you make a purchase with BNPL, you’re essentially taking out an installment loan. The BNPL provider divides the total of the purchase price into multiple, even-sized payments that you then make on a regular basis. Many BNPL providers do not charge interest on your balance so long as you keep up with payments. You’re able to borrow the money required for the purchase without paying interest, as you would with a credit card or other personal loan.
Know when to use it
There is a time and place for BNPL versus other financing options. BNPL is particularly helpful when you have steady recurring income and can make incremental payments for a purchase you can afford. Plus, if you pay on time and on schedule, you may be able to avoid interest charges on the money you’ve borrowed.
BNPL is ideal for purchases that might have too high a sticker price for you to afford them upfront. If you can afford incremental repayments, you may want to consider using a BNPL service. This could help you avoid credit card or other loan fees.
Understand how BNPL impacts your personal finances
The interest-free repayment schedule and quick approval turnaround with BNPL payments makes them a unique way to buy. Plus, getting approved for BNPL usually takes seconds, whereas opening a new credit card to finance your purchase can be a longer process.
How BNPL purchases impact your personal finances are similar to other payment types, however. For example, your BNPL loan may not get reported to credit bureaus, but the damage that comes from late payments (or no repayments at all) can be just as damaging as a missed credit card payment. Even if your BNPL provider doesn’t report your loan to credit reporting bureaus, you may still damage your finances significantly with missed payments or by defaulting on what you owe.
Prepare yourself for repayments (and debt)
BNPL may make it easier for you to purchase something online, but that doesn’t mean the underlying product is still affordable for your budget. Just like with credit cards, it’s critical not to buy things you can’t afford—especially if it means incurring potential debt and interest in the event that you can’t pay for what you bought.
Develop a plan for paying back your BNPL before you place your order. Being able to purchase something isn’t the same as being able to afford it: a BNPL may reduce purchasing barriers, but won’t necessarily make something too expensive for your budget fit within your means. Make sure you understand your cash flow and whether or not you can keep up with required repayments. If not, you may want to reconsider your purchase.
Making the most of BNPL through smart spending
BNPL can be an alluring option for people who need to make a purchase quickly but may not have the funds to do so right away. These tools are also helpful for people who may want to avoid using a credit card for a big purchase, thus not carrying a card balance on the purchase that comes with interest payments. That’s not to say that BNPL is without its limitations, however. The risk of racking up debt is still present, and the financial consequences that come with missing payments can still be significant.
When thinking about your purchase options, be sure that you know what you’re dealing with financially. A financial professional can help you determine if BNPL is the best option, or if there are other means of making the purchase you want in a financially sensible way.