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Buy Now, Pay Later (BNPL): What It Is, How It Works, Pros and Cons

By: iTHINK Financial | May 01, 2023

The Buy Now, Pay Later (BNPL) payment method, also known as point-of-sale loans, allows customers to make purchases without the burden of paying interest or the total amount upfront. Payments for the product occur later in split installments, usually over a set period.

With a rise in apps featuring this financing option for purchasing items online, BNPL has exploded in popularity among consumers who want an alternative to traditional payment methods. From 2020 to 2021, the global BNPL market value doubled to an estimated $120 billion, predicted to top $450 billion by 2026.

However, while BNPL has many benefits, it also has its risks. If you're considering using BNPL services or want to know if it's right for you, keep reading to learn what BNPL is, how it works, and weigh the pros and cons.

What is Buy Now, Pay Later (BNPL)?

Buy Now, Pay Later (BNPL) is a flexible payment option that allows customers to purchase a product immediately but pay for it later in usually interest-free weekly, bi-weekly, or monthly installments. Essentially, BNPL is a credit-based pay-later agreement.

BNPL has become increasingly popular with Gen Zers and Millenials. Young consumers can pay manageable amounts over time rather than the entire sum upfront.

Often, breaking up the cost allows customers to make purchases they wouldn't have been able to afford otherwise. Shoppers with poor credit or limited funds can use BNPL to keep up with certain luxuries like the latest fashion trends and electronics.

How Does BNPL Work?

Using the BPNL is easy — all you have to do is choose the BNPL option at checkout and fill in a credit application. Credit approval is usually instantaneous; once the purchase is completed, you can take the product home or wait for delivery of the online item. The BNPL provider takes care of the repayments, which are often interest-free if paid off within a specific time frame.

Most BNPL interest-free offers divide the total cost into four equal installments. Customers pay the first quarter of the amount at checkout. The remaining three payments are due every two weeks. For example, for a $1000 purchase, a consumer will pay $250 upfront, followed by three biweekly payments of $250 each, ideally paying off the total in six weeks.

Pros and Cons of BNPL

How do you know if BNPL is right for you? While Buy Now, Pay Later offers increased purchasing power to obtain desired products or services immediately without paying the total amount upfront, it can also lead to increased debt and financial stress. Read on to discover the benefits and potential risks.

The Benefits of Using the BNPL Option for Consumers:

Improves cash flow by spreading the cost of purchases over an extended period

Increases purchasing power due to not having to pay the total amount upfront

Interest-free financing allows customers to split their purchases into smaller, more manageable payments without paying more than the original amount.

Provides an alternative form of credit for those with limited access to traditional credit sources, such as younger consumers, who may not have an established credit history

Shorter repayment periods and clearly defined payment terms help consumers avoid overspending and manage their finances more effectively.

Maintains a consumer's credit rating as approval often does not affect a user's credit score

Makes online shopping more convenient, with easy access to major retailers and quick approval

The Possible Risks of Using BNPL Services:

Can encourage impulse buying and overspending, as consumers may be more likely to make a purchase they don't have to pay for right away

Easy to accumulate debt by using multiple BNPL services or making several purchases without considering the total amount owed

Missed or late payments can result in late fees, which can add up quickly

Interest charges on the remaining balance can occur when the purchase isn't paid off within the agreed-upon timeframe or if terms and conditions are not fully understood

Missed payments can still be reported to credit bureaus, which can negatively affect a consumer's credit score

Security risks of personal and financial information being compromised through cyberattacks or data breaches

BNPL services may not offer the same level of consumer protection as traditional credit cards, such as dispute resolution or fraud protection

Best Practices for Using BNPL Responsibly

It’s important to take a few safety measures when taking advantage of the BNPL payment option. Only purchase what you can afford and avoid impulse buying by adhering to your budget and prioritizing essential items over luxury or non-essential purchases.

Additionally, understand the terms and conditions of the BNPL service, including interest rates, possible late fees, and penalties to avoid surprise charges. When choosing a BNPL option, select one with transparent and affordable terms that suit your financial situation.

Lastly, maintain timely payments to avoid late fees and potential negative impacts on your credit score. The recent rise in BNPL availability has gained the attention of the three major credit bureaus. Expect more impact on your credit score going forward with BNPL use. Fortunately, you can improve your credit with BNPL by paying on time and in total with each transaction.

Alternatives to BNPL

Credit cards with introductory rates of 0% interest can be a viable choice if the consumer is confident in their ability to pay off the balance before the promotional period ends and the interest rate increases.

Additionally, small personal loans can give the borrower a lump sum of money at a fixed interest rate over a predetermined repayment period. Personal loans can be a flexible financing option for consolidating debt or making significant purchases.

The Bottom Line for Buy Now, Pay Later

The Buy Now, Pay Later trend is disrupting the credit industry by empowering consumers with more control over their finances. BNPL has become increasingly in demand with consumers who like its flexibility, quick approval, and interest-free payments. Plus, the convenience of BNPL apps allows customers to finance larger online purchases easily with a few clicks.

However, use BNPL responsibly and within your budget to avoid financial woes. Read the terms and conditions before agreeing to make it your payment method. As with any credit-based payment option, manage your finances carefully to reduce taking on more debt than you can handle.

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