Have you ever noticed a feature that allows you to buy something now and pay over some number of equal payments spread across the next few weeks or months? If you hadn't, next time you shop online look closely. Because there is a new payment method in town called Buy Now, Pay Later (aka BNPL).
How does BNPL work exactly?
BNPL is offered as a payment option, alongside your everyday credit and debit cards, or PayPal. For example, BNPL lenders like Klarna or Affirm allow you to buy that $100 coffee machine you've always wanted by paying only $25 at checkout, and then $25 automatically every two weeks until you’ve paid it off completely. Sounds interesting, right?
Well, there’s more...
- No credit check is required. BNPL companies ask for a few personal details and use an algorithm instead of a full credit check, so you don’t need credit history to qualify.
- It's frictionless, as folks are typically approved instantly.
- And plans typically charge no interest.
So what’s the catch?
Even though BNPLs offer interest-free periods, penalties for late payments can be steep (even steeper than those for credit cards).
BNPL will rarely improve your credit, but it can hurt it. While you don't build credit for making on-time payments, your credit score could get dinged when you're late, especially if the balance is turned over to a collection agency.
Unlike credit card companies that make money from interest payments, BNPL revenue comes primarily from stores. And retailers are willing to fork over the money because, with this option, consumers are shopping more regularly and spending more dollars.
Retailers love BNPL because it solves a big problem in the industry — shopping cart abandonment. Shoppers like it too because it's easier to get something they otherwise wouldn't be able to afford. Not to mention impulse purchases!
💡 When used responsibly, BNPL can be a nice way to spread out your spending and make it easier to purchase things you need or want. And BNPL can help you with your cash flow when you don't have enough cash on hand.
💡 Don’t overlook the fine print because this could lead to costly mistakes down the road. BNPL vendors make it almost too easy to transact, so you could be signing up for a bad deal.
💡 BNPL is still a loan, and like other debts, it can hurt your financial health if not managed wisely. If you tend to overspend, BNPL will further amplify that. If you decide to go down the BNPL route, use it wisely and exercise caution!