The Buy Now, Pay Later (BNPL) market continues to grow, offering consumers flexible payment solutions for everyday purchases. Major BNPL providers like Affirm, Klarna, and Afterpay have refined their offerings to make installment payments more accessible, with some introducing subscription-based plans and enhanced budgeting tools.
While BNPL can be a convenient way to manage expenses without immediate full payment, borrowers should be mindful of potential costs, such as steep late fees, and how installment payments may impact their overall financial health.
As regulations evolve, BNPL companies adjust their policies to ensure responsible lending while providing more transparency to consumers. If you’re considering BNPL, comparing providers and understanding the terms can help you make the best financial decision.
How Buy Now, Pay Later Works
Buy now, pay later, often referred to as BNPL, isn’t a new concept. In the past, BNPL options were traditionally reserved for big-ticket items. Retailers selling furniture or appliances offered installment payment options in an effort to draw in more budget-conscious customers, without forcing them to use a personal loan or credit card.
Customers would make a purchase but only pay a small portion of the total purchase price upfront, agreeing to pay the remaining balance via fixed payments over the course of several months or a few years.
Today’s BNPL options work similarly. Consumers can now opt for installment payments on much smaller purchases from numerous retailers in person and online. Retailers connect with buy now, pay later services, like Afterpay, Klarna, and Affirm, to offer installment payment options to their customers.
When checking out, customers can usually opt to pay in four to six equal installments instead of paying all at once. These installment agreements do not typically charge interest, and minimal credit checks are performed. So long as payments are made as agreed, consumers can break up the cost of their purchases over time, making them seem more affordable.
Younger generations of shoppers are flocking to buy now, pay later installment agreements. Afterpay alone touts tens of millions of customers and billions of dollars of sales each year.
However, the question remains: are installment payment agreements the best option for cash-strapped or budget-conscious consumers?
It’s worth looking at the advantages and disadvantages to decide for yourself.
The Pros of Buy Now, Pay Later
The most obvious advantage of buying now and paying later for consumers is the option to make large purchases they may not normally be able to take on. Paying four installments of $100 over a period of four months makes a $400 purchase feel more in reach. Breaking up the cost burden also helps consumers budget their spending.
In addition to the reduced financial burden of upfront payments, consumers appreciate that BNPL typically only requires a soft credit check, if any. Making it easier for people with poor credit to buy items over time. Also, payments are not usually reported to the credit bureaus. However, missing payments could affect your credit score if the debt remains unpaid for a significant amount of time and is turned over to a debt collector.
Unlike credit cards and loans, buy now, pay later providers allow consumers to sign up with minimal effort, and nearly anyone can use an installment payment plan offered by a retailer.
Retailers benefit from this payment option just as much as consumers. They can appeal to broader market demographics when various payment options beyond traditional credit or debit card selections are available.
Finally, buy now, pay later agreements do not charge ongoing interest, and there are no sign-up fees or costs to the consumer associated with breaking up payments. This has been the main draw for younger generations looking for credit card alternatives when shopping. Retailers bear the cost burden by paying fixed transaction fees and commissions as a percentage charged by the BNPL provider.
The Cons of Buy Now, Pay Later
Although buy now, pay later agreements are attractive to many, downsides exist. First, consumers don’t get the benefit of credit reporting that comes with credit card use. No positive information about these installment payment plans is reported to the credit bureaus. However, the negative consequences of failing to pay for a BNPL purchase could have the same ramifications as missing a credit card payment. Providers can report missed payments to a consumer’s credit file and pursue collection remedies if they see fit.
Additionally, the no-cost appeal of BNPL agreements can quickly turn sour if consumers aren’t paying close enough attention. Some providers charge fees for changing a payment due date or when a payment doesn’t go through. Late fees can be as high as 25% of the total purchase, putting consumers in a costly cycle. The fine print for buy now, pay later installments may be hard to find or easy to dismiss, leaving consumers at a loss when fees begin to add up using this method.
Most importantly, though, is the true affordability with BNPL agreements. Many consumers feel installment payments broken up over time are more doable than a larger, single upfront payment. However, the ability to have multiple buy now, pay later agreements in place can create a heavy financial burden month to month. Some critics of BNPL argue that these plans perpetuate consumerism in the worst way, making buyers feel like they can afford far more than their budget allows.
What to Consider When Looking at BNPL as a Consumer
Buy now, pay later agreements offer a helpful alternative to credit cards for certain consumers. Without interest charges and other upfront fees, little to no credit reporting, and minimal application requirements, buyers often appreciate the ability to break up payments for purchases of nearly any size, under the guise of affordability and more control. However, it is essential to understand that not all that glitters is gold.
Only consumers with a strong handle on their cash flow month to month can accurately evaluate the affordability of BNPL purchases. Those buying without this understanding of their financial situation may find more challenges than benefits ahead. The fees for changing the installment plan or missing a payment can be high, and spending too much too quickly remains an issue.
As more retailers partner with buy now, pay later providers, consumers should take the time to consider what is truly best for their financial situation, both now and later. While buy now, pay later services are nice to have, be careful with your finances, and read the fine print so you understand what you’re getting yourself into.