Buy-now-pay-later makes it easier to purchase expensive items, essentially lending you the money to make a purchase in exchange for recurring repayments. Many consumers may not understand the finer details of how BNPL providers work. In fact, BNPL works differently than other common forms of credit, such as credit cards and loans. What consumers don’t know can create credit challenges, however.
The relationship between BNPL and debt
BNPL is often billed as an alternative to using a credit card, especially as far as interest payments are concerned. BNPL is designed to front you the money for a purchase in exchange for regular repayments over time. Since you’re financing your purchase when you use BNPL, you’re incurring debt as you would with another financing option.
Most BNPL providers do not charge interest so long as you pay back what you owe on time and do not miss payments. If you begin to miss payments, however, you may face steep interest charges. If you can’t afford to make repayments on your purchase, you’re still as likely to incur debt as you would be through other borrowing options.
BNPL versus credit cards
BNPL is often billed as an alternative to using a credit card, especially as far as interest payments are concerned. Your average credit card charges interest on your balance, which may have you paying more for a big purchase if you can’t pay it off at the end of your billing cycle.
Financing through BNPL typically means avoiding interest charges while still being able to pay in installments. Plus, approval for BNPL financing can happen faster than credit cards—often within seconds after application and without a hard credit pull that might lower your credit score.
The debt you incur through BNPL can still have a similar effect on your finances as a credit card can. Both options require consistent repayment terms; if you spend more than you can afford, both forms of debt can weigh down your budget flexibility. If you miss or stop making payments on your BNPL balance, you may end up paying late fees, have your account frozen, or even have your debt turned over to a collection agency.
The role of BNPL and your finances
Just because BNPL may make it easier for you to purchase a big-ticket item more quickly doesn’t mean you can afford it. In most cases, BNPL provides the money needed to make an expensive purchase, but you’re still responsible for making recurring, punctual payments.
If your BNPL repayments aren’t affordable, you may incur significant debt. According to one recent survey, 70% of BNPL users say that this tool played a role in them overspending on purchases. Another 42% say they’ve made late payments on their balance.
In other words, BNPL can help you make a large purchase without potentially having to save up first, or to put it on a credit card that charges interest. Using BNPL doesn’t make a purchase more affordable if you can’t make recurring repayments, however. You’ll still need to make sure you can afford the item you’re purchasing, even if you’re paying through installments.
The connection between BNPL and your credit report
Most BNPL loans aren’t reported to credit bureaus, unlike credit cards. Younger borrowers or those with low credit scores may therefore find it easier to qualify for BNPL financing. This means you won’t have a hard credit pull that can lower your credit score, at least temporarily.
This is beginning to change, however. Equifax rolled out plans to incorporate BNPL into its credit reporting framework in 2021. Other bureaus, such as TransUnion and Experian, announced similar plans this past spring.
The pros and cons of having BNPL loans reported to credit agencies depends on how you manage repayments. Borrowers who pay on time and keep up with their repayments could potentially see their credit score increase. Those who have a hard time keeping up with their BNPL repayments may see their credit score take a dive.
Is BNPL right for you?
There may be instances in which BNPL is the right way to make an expensive purchase. In others, a credit card or personal loan may work better. Or, in some cases, it might be best not to make a purchase through financing at all. If you’re unsure which (or if any) option is right for you, consult with a financial professional to help you assess your options.