The Pros and Cons of Buy Now, Pay Later Financing

During the checkout process of online shopping, have you noticed special payment offers that promise to let you “buy now and pay later” popping up in recent years? Fintech companies like Affirm, Afterpay, Klarna, and Sezzle are among the most common Buy Now, Pay Later (BNPL) providers around, though bigger companies like Paypal, Chase, and even Amazon have begun offering their own buy now, pay later programs as well.

At first glance, the BNPL programs – also known as “point-of-sale loans” – may seem like they’re too good to be true. After all, isn’t paying over time already something you can do with credit cards? What makes the ‘buy now, pay later’ option any different?

To learn more about what BNPL programs have to offer, as well as some of the downsides, let’s explore the pros and cons to see if they would be the right fit for your next online purchase.

Pro: Low to No Interest Offers

One of the clearest benefits of purchasing an item with a buy now, pay later service is the low or even 0% interest charged on purchases (as long as they’re paid off completely within a set timeframe). For example, if you had to choose between buying an item with your 21% APR rewards credit card or a 0% BNPL program with payments neatly divided into equal monthly installments, which option would you pick? It would be a no-brainer to opt for the lower/no interest payment plan.

It’s important to note that not all BNPL services offer 0% interest to consumers; it typically depends on the company’s policies, your credit history, and repayment terms.

Con: Encourages Impulsive Spending

A 2021 survey from C+R Research revealed that 59% of respondents had used a BNPL service to purchase an “unnecessary” item that they couldn’t have afforded otherwise. The most common retail categories that consumers from the survey used buy now, pay later programs to pay for included clothing, electronics, and furniture. Furthermore, the study revealed that 10% of consumers reportedly use BNPL services at least once per week or more, and 47% of consumers choose the ‘buy now, pay later’ option when shopping online either “most” or “all” of the time.

While online shopping habits vary from person to person, the fact remains that BNPL options make it easier than ever to spend money to get what you want now and worry about the consequences (repayment) later. This is why budget-conscious people typically pay for most purchases with cash; the physical act of paying with cash has the psychological benefit of showing a clear financial trade-off in ways that using a credit card or BNPL service does not. If impulsive spending is a concern for you, then using a ‘buy now, pay later’ program could open a can of worms that could break the bank if you’re not careful.

Pro: Flexible Pay-Off Date Options

The ‘buy now, pay later’ programs wouldn’t have gained so much popularity with consumers if there were only downsides to using these services. Another major advantage they offer is the ability for consumers to pay off their purchases in regular biweekly or monthly installments over the course of 2-10 months or even 1-3 years, depending on the terms of the loan and conditions for repayment.

The BNPL repayment model makes it easier for consumers to determine how much they have to repay on a regular interval, whereas credit cards can be much more confusing with minimum payment requirements (which are often substantially lower than the overall balance), varying interest rates, and statement balances.

Con: Higher Fees

Since so many of these services offer 0% interest on purchases, you might be wondering how they make money at all. This is where the fees come in. If you don’t pay off your BNPL purchase within the specified timeframe, you could be hit with fees ranging from 20-35% or more in some cases!

To make matters worse, these fees might apply to the entire purchase amount, not just the remaining balance. This can easily make BNPL services not worth the cost if there’s a risk you’ll miss the payment deadlines.

Pro or Con: Unclear Consequences for Your Credit Score

The impact of ‘buy now, pay later’ programs on consumers’ credit scores isn’t entirely clear. On one hand, many BNPL companies do a soft credit pull to determine whether you qualify, which means it shouldn’t negatively impact your credit score. It could even help your credit score if the company reports your timely payments to any of the three major credit bureaus.

On the other hand, how credit scores are calculated may change in the near future to account for BNPL loans, which could hurt your credit score if you have several BNPL accounts open and/or you miss a payment at any point. For example, if you use a BNPL service 3-5 times, each of those transactions may be reported to credit bureaus as separate accounts. This could possibly do quite a bit of damage to your credit score because the influence of credit history (number of accounts, average length of credit account) factors heavily into credit score calculations.

For now, there is not a clear positive or negative impact on credit for many consumers; when FICO and Vantage update their scoring models to take more ‘buy now, pay later’ loans into account, the benefits or drawbacks of BNPL services will depend on whether the borrower repays their loan on-time and in-full.

Thanks to their 0% interest rates, clear repayment timeframes, and potential to boost your credit by demonstrating a consistent track record of timely payments, ‘buy now, pay later’ programs have become wildly popular within the past couple of years. Credit card companies have taken note and begun offering their own fixed-installment, pay-over-time programs, but this level of convenience comes with strings attached. If there’s a risk of making more impulsive spending decisions or you might miss a payment and get hit with a hefty penalty, it might be best to avoid BNPL services unless you have a solid game plan for repaying them ASAP.