Q: When shopping online, I often see an option to Buy Now, Pay Later. Is BNPL a good option?
A: The option of paying for your purchase over time can seem attractive, but it’s important to understand how BNPL works and the potential disadvantages
What is buy now, pay later?
BNPL is a financing option that allows you to purchase items right away while breaking up the full cost into smaller, interest-free payments over time. Typically, BNPL plans charge no interest as long as payments are made on time.
What are the advantages of buy now, pay later?
The BNPL option has several advantages:
1. Interest-free payments
Unlike paying with a credit card, which typically means paying interest on the purchase, BNPL is an interest-free payment structure, as long as you stick to the payment plan.
2. Budget-friendly flexibility
BNPL provides flexibility, making expensive items more accessible to consumers who might not have the cash to pay in full upfront.
3. No credit check
Many BNPL services do not require a credit check for approval, which can be a relief for those with less-than-perfect credit or for those who want to avoid a hard inquiry that could lower their credit score.
4. Convenience
BNPL services, like Afterpay, Klarna and Affirm, are integrated into many popular retail websites. There’s no need for a lengthy application process, and your approval decision is usually instant.
What are the disadvantages of buy now, pay later?
The BNPL payment model is not without disadvantages. Some of these include:
1. Encourages impulse spending
Choosing the BNPL option can be an easy way to fall into the trap of overspending. Knowing that you don’t have to pay for the full amount immediately can tempt you into making purchases you might otherwise avoid.
2. Late fees and penalties
While BNPL is typically interest-free, many of these services charge fees for late or missed payments, which can make the total cost of your purchase significantly higher than expected.
3. No credit building
Unlike credit cards, which report to credit bureaus and can help you build credit when managed responsibly, BNPL services generally do not contribute to credit building.
4. Limited purchase protection
Credit cards often come with purchase protections, such as extended warranties, fraud protection and dispute resolution if something goes wrong with your purchase. With BNPL, these protections are either very limited or nonexistent.
5. Potential debt accumulation
BNPL can still lead to debt accumulation if not managed carefully. The ease of splitting payments might encourage shoppers to take on multiple BNPL plans at the same time, which can lead to future budgeting challenges.
When should I choose buy now, pay later?
BNPL can be a helpful tool if you’re making a planned, necessary purchase and you’ve already budgeted for the payments. Additionally, BNPL can be useful if you need something immediately but can’t pay for it right now. Finally, if an item you plan to buy soon is temporarily discounted, it can be worthwhile to buy it now and pay it off, thus saving on the purchase price. Before you choose BNPL for any reason, though, be sure you can pay off the balance within the agreed timeframe.
When should I avoid buy now, pay later?
It’s best to avoid BNPL if you’re prone to impulse purchases or if you’re already carrying debt. If you struggle with managing payments or keeping track of bills, the risk of late fees and penalties likely outweighs the benefits of spreading out payments.
Use our guide to learn about BNPL so you can make an informed decision before choosing this payment option.
