What you need to know about ‘Buy Now Pay Later’

Published on Dec 13, 2021

What you need to know about ‘Buy Now Pay Later’

If you’ve made an online purchase recently, you’ve probably seen an option to Buy Now, Pay Later (BNPL). The latest digital payments trend, BNPL allows shoppers to break down almost any purchase into installment payments without using a credit card. It has become a standard option for online shopping, and it’s also available at many brick and mortar stores.

While BNPL has been around for a few years, it’s really taken off recently. In fact, since 2019, Millennials’ use of BNPL has more than doubled to 41 percent, and Gen Xers’ use has more than tripled to 30 percent. But having the option to pay for a purchase in installments doesn’t mean it’s always a good idea. Before opting for BNPL, make sure you understand all the details.

How does Buy Now Pay Later work?

When you’re ready to make a purchase, you’ll see an option for BNPL at checkout. When you’re shopping online, you may see a breakdown of how much you’ll pay today and how much you’ll pay in future payments if you want to break your payment into installments instead of paying the full balance. Seeing the lower amount you can pay down is often tempting—and that’s the point.

The terms of the BNPL agreement vary based on which provider the retailer is using. Some BNPL providers charge interest on your purchases, while others only charge late fees.

Many BNPL providers offer a four-payment model that allows a shopper to break a purchase into four equal payments, paying the first at checkout and the remaining three every two weeks afterwards. In six weeks, the purchase is completely paid for.

How does Buy Now Pay Later affect credit scores?

Using BNPL may or may not affect your credit score. Some BNPL providers will report the payment arrangements to the credit bureaus and others do not, and some report only certain types of BNPL loans.

If your BNPL agreements are reported to the credit bureaus, each BNPL purchase will show up as a separate loan on your credit report. If you’re trying to build credit or improve your score, making on-time installment payments on the BNPL purchases may help you. That’s because on-time payment history represents 35 percent of your FICO score.

However, when a BNPL purchase is completely paid for, the account is closed and removed from your credit report (if it was reported in the first place). That removal can decrease the average age of your credit history. That can make a difference, as length of your credit history accounts for 15 percent of your FICO score.

Will Buy Now Pay Later cost you more in the long run?

The answer depends on the type of payment arrangement you use, as well as your ability to make all the payments on time. If you use a BNPL provider that charges interest on your purchase, taking the installment route will cost you more than simply paying the full purchase price at checkout.

Also, if you don’t make the installment payments on time and the BNPL provider you’re using charges late fees, you’ll end up paying more than the price of the original purchase.

However, if you use a BNPL provider that doesn’t charge interest and you make all the installment payments on time, you should be able to pay the same amount you would have paid for the purchase at checkout. You’ll simply be able to spread out the purchase over a few weeks or months.

Should you Buy Now Pay Later?

To decide whether you should take advantage of point-of-sale installment agreements, you need to think carefully about your answers to a few questions. First, can you afford to make the installment payments on time? If you can, and you’re committed to doing so, the payment arrangement might work for you.

Second, can you use a BNPL product that will not charge interest on your purchase? If not, you’ll be paying more than the original cost of the purchase, so BNPL may not be the best option. For example, if you use a credit card, you may be able to get a lower interest rate than the BNPL lender.

Third, will any potential impact to your credit be positive or neutral? Your answer to this question will depend on your current credit score and your goals for your credit score. It will also depend on whether the BNPL provider will even report your payment arrangement to the credit bureaus.

Finally, is the purchase necessary and does it fit into your budget or spending plan? If not, you may be tempted to use BNPL to purchase something that you really don’t need or can’t afford. If that’s the case, try to resist the temptation and stay committed to your budget.