Overview
Buy Now, Pay Later (BNPL) plans trace their origins to the layaway programs and installment plans of the early 20th century. Layaway allowed customers to reserve a product by making a deposit, but the customer would only receive the product after the full payment was made over a series of installments. Installment plans provided the product upfront and required payment over several installments.
The emergence of credit cards in the 1950s allowed for a more flexible borrowing structure. However, credit cards came with potentially high interest rates, fees, and credit checks, which left out some consumers.
In the Internet era, several companies – e.g. Klarna, Afterpay, and Affirm – repackaged BNPL plans for online shoppers. While BNPL may offer certain benefits, particularly for consumers with limited credit access, this form of deferred payment also has potential drawbacks.
The Rising Popularity of BNPL
BNPL has become a popular online payment option, particularly for millennials and Gen Z. It may allow consumers to purchase more expensive items without paying the full price upfront. It may also allow consumers to avoid high interest rates and fees. However, not all BNPL plans are interest-free, and the ease of purchase can lead to overspending and so-called debt stacking. Having multiple BNPL plans on the go may confuse consumers as they lose track of their purchases. Overdrafts can lead to high fees. Therefore, BNPL is not necessarily the silver bullet that consumers, particularly younger generations, may wish it to be.
Is BNPL Right for You?
Like any payment plan, BNPL offers a mix of advantages and disadvantages. While the ability to pay for a purchase in equal installments may seem tempting, there are potential downsides to an over-reliance on BNPL. Here are six pros and cons of this payment method.
Pro: Potentially Interest-Free Loans
Unlike other credit products, BNPL plans may be interest-free and allow consumers to pay for a more expensive product over a series of installments, rather than all at once. However, not all BNPL products are interest-free. There have been stories of consumers being surprised that their BNPL plans actually carried an interest rate. Therefore, make sure you know the terms and conditions attached to your BNPL plan.
Con: Hidden Fees
While BNPL plans may often be interest-free, late or missed payments may result in additional interest and fees. If you do not have sufficient funds in your bank account to cover a payment, it may lead to non-sufficient funds (NSF) fees and overdraft charges. Therefore, carefully review the terms and conditions and any fees you may not be aware of, at first glance.
Pro: No Hard Credit Check
Obtaining a BNPL plan may be easy and convenient. While credit cards often require a credit check and/or a particular credit score or credit standing, BNPL often can be obtained with a click of a button. You may be approved without a hard credit check, so your credit standing will not be affected. This may be particularly beneficial for subprime and near-prime borrowers.
Con: Successful Payments May Not Be Reported to Credit Bureaus
While missed or late payments may be reported to credit bureaus, potentially leading to lower credit scores, successful payments may not be reported. That means successfully paying back your BNPL plan will likely not have any particular positive impact on your credit score. Failing to make the payments on time, meanwhile, may result in a lower credit score.
Pro: Ability to Split Up Payments
BNPL plans may often come with a limited upfront payment – perhaps 25% of the total price – and the ability to pay the rest in equal installments, often four equal installments in total. This may help make high-ticket items more accessible for shoppers, particularly those with subprime and near-prime credit scores.
Con: May Lead to Overspending
The ease and convenience of BNPL purchases may inadvertently lead to overspending. You may lose track of your purchases and pending payments. You may also underestimate the cost of a BNPL purchase. Missed or late payments may result in additional fees. Bank overdrafts may add to the cost burden.
Pro: Predictable Payment Plans
BNPL plans offer predictable payment schedules. Payment schedules come in several varieties. One is pay-in-4, where the first payment is due on the date of the purchase and the remaining payments are due every two weeks. There are also monthly payment plans spread over 3, 6, or 12 months. There are also deferred payment plans where the rest of the payment is due after a certain period of deferment, such as 30 to 90 days.
Con: Lack of Consumer Protections
BNPL is a fledgling industry, which may come with more limited regulations and consumer protections. This may leave consumers exposed to hidden fees or other difficulties.
Pro: No Long-Term Commitment
BNPL purchases are typically repaid over a relatively short period of time, potentially just four equal installments, which means there is no commitment over an extended period. This may help make BNPL less burdensome compared to long-term financial obligations.
Con: Risk of Overdrafts
The ease of this payment style may lead to underestimating the cost, especially when you stack multiple purchases. If you run low on cash and cannot cover an installment, it may lead to additional charges and fees, which will significantly increase the cost of the loan as well as having a negative impact on your credit score.
Pro: Easy Approval Process
BNPL comes with a quick and easy approval process, which may make it more accessible to some consumers, compared to traditional credit cards.
Con: Returns Can Be Difficult
Due to the newness of the industry, there may be a lack of regulations and consumer protections, which can make returns and refunds particularly difficult. Therefore, make sure your purchase is one you really want and can afford.
Final Thoughts
BNPL may help consumers, particularly those with lower credit scores, purchase high-ticket items online. However, like any payment method, it comes with its own risks and benefits. It is one of many financial strategies available to borrowers, especially those with subprime and near-prime credit scores.
Consumers with lower credit scores may opt for online installment loans to help them cover urgent expenses. Online installment loans, also known as personal loans, are another source of credit for subprime and near-prime borrowers. Our online application process does not involve a credit check. If you need cash quickly, simply apply online via Crediteck.
To improve your credit score, sign up for Credit Verify. You will be able to monitor your credit health and automatically find mistakes on your credit report.
