Have you had your eye on a big-ticket item recently and noticed on the retailer’s website an offer to break up that purchase into smaller payments over time?
Installment payment plans like Buy Now, Pay Later (BNPL) are rising in popularity, especially with millennials and Gen Z, because they allow customers to make their purchases right away while paying back the full amount later. Did you know that spending on BNPL platforms in the U.S. has increased by 230% since the start of 2020.
Often, these plans come without extra fees or paying interest on the balance. Before clicking “buy now” on the online shopping cart, here are four things to keep in mind when you’re trying to decide if using BNPL is right for your next purchase:
So, what exactly is Buy Now, Pay Later?
BNPL, also known as “point-of-sale installment loans,” is relatively straightforward to understand, but it is important to remember that these plans are considered loans. BNPL lets customers make an upfront payment (typically about 25% of the total amount) and pay the rest off in set installments over a certain period. Because the repayment period is confined to weeks or months, these loans are often interest-free and don’t impact your credit score in most cases.
Should you use Buy Now, Pay Later instead of a credit card?
The choice of which to use will be unique to each person and purchase. There are pros and cons to both BNPL loans and credit cards, and you should think through the purchase carefully no matter how you are paying.
BNPL loans are typically interest-free and broken up into smaller, manageable payments over a set period. On the other hand, it’s ideal for credit card balances to be paid off in full each month and the balance may accrue interest. Depending on your card, you may get benefits from purchasing items with a card like miles or cashback.
What’s the process to use these loans?
While BNPL is gaining popularity in stores, it’s currently used primarily for online shopping. While some banks and credit card companies offer this type of financing, it’s most common for businesses to partner with a third-party service like Klarna, Affirm, or Afterpay, to offer BNPL.
The process to apply for a BNPL loan is typically fairly simple and you will know relatively quickly if you are approved. You are entering into an agreement with whoever is servicing the BNPL loan, and that servicer pays the business directly for the product you are purchasing. For example, let’s say you’re going to buy a couch from your favorite online furniture store that offers BNPL. You’d make the purchase through the store’s site, but be responsible for payments to the partnering lender. And in the meantime? Voilà, couch delivery!
What else should I know about Buy Now Pay Later?
There are many reasons why BNPL is popular:
But BNPL comes with some baggage, too:
Our advice? Read the fine print and use your best judgment
Like other financial tools, BNPL short-term loans can be helpful to customers who are informed of the pros, cons and responsibilities that come with this type of payment plan. As with any purchase, we advise considering your short- and long-term financial goals before making substantial purchases. Happy shopping!
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