How Does Buy Now Pay Later Work?
Layaway may seem like a throwback, but the concept is making a comeback with Buy Now Pay Later (BPNL). Also referred to as point-of-sale installment loans, BNPL arrangements are becoming an increasingly popular payment option, especially when shopping online. As its name suggests, buy now, pay later lets you make a purchase and receive it immediately, but pay for it at a later time, usually over a series of installments.
Retailers from Amazon to Walmart and apps like PayPal, Square, and Klarna are letting shoppers buy now and pay later. Even landlords, utility companies, and insurers are offering this option.
How Does Buy Now, Pay Later Work?
Buy now, pay later payment plans typically allow shoppers to split their purchases into three to six installments, often with no interest charges. BPNL generally requires shoppers to make an initial payment at the time of purchase, then pay the remaining balance off in installments. They often don’t require a hard credit check, or in some cases, any credit check at all, to qualify.
During check out, you’ll see an option to break up your total purchase and pay a smaller amount now instead of the full balance. If interested in BNPL, you’ll fill out a short application directly on the checkout screen. It may ask for information like your name, address, date of birth, and phone number. You will also provide a payment method. Then, the BNPL provider may perform a soft credit check, which won’t affect your credit score and approve or deny your application in a matter of seconds. Approval criteria vary, but you may still be eligible even if you have bad credit or no credit.
What Does Buy Now Pay Later Cost?
In general, if you repay the price of what you bought within the delay period, you won’t pay any interest. If you use buy now pay later carefully, you could delay paying for something for several months, or even a year, and not pay a penny in interest. Many big firms won’t charge you any interest if you clear your balance before your delay period is up – even if you only paid the day before. However, some BNPL plans can charge an annual percentage rate of up to 30%.
However, you need to be careful not to miss a payment – because of how buy now pay later works; it can quickly become expensive if you don’t make your repayments on time. If you don’t clear your debt before the delayed period is up, some providers will ask for a settlement fee, or a lump sum of interest may be added to the debt.
On top of that, you may be charged late payment fees – late fees range from $7 to $8 and are usually capped at 25% of the order value. Missed payments could also be recorded on your credit report and affect your credit score.
Should You Use Buy Now, Pay Later?
The idea behind buy now, pay later is that you can get the things you need immediately while also getting a little extra time to pay for them. These loans extend your credit without imposing steep interest charges but with a repayment schedule, so you don’t get into a mountain-of-ongoing debt situation. And it’s possible to get approved for this type of financing even if you’ve been shut out of other loan options due to a low credit score.
On the downside, BNPL doesn’t help you build credit – your payments aren’t reported to the credit bureaus, so you won’t be building a positive credit history with these apps as you would with a credit card. You also miss out on any perks that credit cards offer, such as cash-back or rewards points. It’s crucial to both your bank account and your credit score that you make sure you can afford the agreed-upon payment schedule.