Buy Now, Pay Later (BNPL): What Is It and Should You Use It?

Since 2020, the rise of Buy Now, Pay Later (BNPL) schemes has skyrocketed, allowing customers to make purchases online without paying for the item all at once; instead of paying for the item in full when you checkout, customers can select the BNPL option, which spreads the payments for the item out over a given period of time.

So, what exactly is BNPL?

Buy Now, Pay Later is a form of short-term financing enabling customers to spread out payments for a purchase over a period in equal instalments. This option is now found at the checkouts of many online retailers.

When selecting the BNPL option, customers will input a few key pieces of information that allow the BNPL firm to either approve or deny short-term financing for customers. This approval process is completed within seconds.

Customers using BNPL will typically pay 25% of the cost of the item upfront and the rest in a further three instalments. Often, this is over six weeks, with shoppers paying the remaining instalments every two weeks.

Usually, this will be without interest or fees, though this depends on the BNPL firm – since the merchant doesn’t facilitate BNPL – and/or the length of the repayment period.

These instalments are typically paid by the consumer via a bank transfer or taken automatically from their bank account or credit card.

What are the advantages for shoppers?

BNPL can help shoppers make purchases they might otherwise struggle to afford, making the purchase more manageable by splitting it into instalments and spreading the cost over weeks or months.

Moreover, compared to financing options such as credit cards and loans, BNPL has lower credit requirements; even those with poor credit can be approved for BNPL, making them a financing option for those with fewer financing options.

What’s more: when getting approved for BNPL, BNPL firms usually only conduct a soft credit check, which doesn’t harm your credit score (however, the PayPal BNPL scheme conducts a hard pull on your credit – which does hurt your credit score).

The instalments paid to BNPL services are usually interest-free, so customers don’t end up paying more for the product just because they took a little more time to pay off the total value of their purchase.

What are the disadvantages for shoppers?

Though BNPL often comes with no interest or fees, this isn’t always the case – particularly if the instalments are made over a more extended period or if payments are made late.

With Afterpay, for example, late fees can cost up to 25% of the value of the purchased item. On the other hand, Affirm doesn’t charge late fees, but their BNPL financing option allows customers to pay their purchase back over 12 months and can charge an APR of 10-30%, depending on shoppers’ credit. 

Another charge to watch out for is deferred interest. Some companies offer ‘no interest if paid in full schemes, in which there is no charge if a customer makes all their payments on time. However, if you miss a payment, retroactive interest may be charged on all previous and future payments. Klarna is an example of a BNPL firm that employs this method, charging deferred interest of 19.99% on the entire purchase if a payment is missed.

More than the potentially costly fine print in terms of the BNPL loan, you should be aware of other potential downsides to using BNPL.

For one, making purchases this way often seem more affordable and budget-friendly, making it easy to overextend and spend money more carelessly than you would when buying the same item outright at full price. This can lead to accruing debt, mainly if interest rates and fees apply to late payments.

Lastly, unlike other financing options such as credit cards, BNPL doesn’t help you build good credit. Building credit is vital because it can help you get more affordable financing and obtain key financial goals, such as owning a house – since good credit allows you to obtain a mortgage.

So, should you use Buy Now, Pay Later?

As long as BNPL is used infrequently and responsibly, it can help to make bigger, one-off purchases easier to afford and more budget-friendly.

However, these schemes also make it easier to overspend, and not factoring in repayments into your budget can lead to missed payments, which can make purchases significantly more expensive than if you’d paid for the item outright.

Moreover, BNPL doesn’t offer many financial benefits of other financing options, such as building good credit or getting cashback/rewards like those provided by credit cards.

So, if there’s a product you need, and spreading the cost of the item over several weeks will help to relieve some of the financial pressure of making the purchase, then it can be worth using Buy Now, Pay Later (BNPL) as a financing option.

Otherwise, you should consider paying for the item in full or using a credit card if you’re sure you can pay off your monthly balance.