In order to pay for expenses like hotels and airline tickets, more consumers are turning to buy now, pay later (BNPL) services because travel is predicted to grow during the Christmas season compared to previous year. While BNPL apps can improve your cash flow and help you avoid paying interest on credit card debt, there are also drawbacks to take into account.
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What is Buy Now, Pay Later?
Buy now, pay later (BNPL), is a fantastic mechanism in which consumers can avail a purchase and pay for them at a later stage, and the best part is that it is mostly with zero interest. This arrangement which is otherwise also known as “point of sale instalment loans,” is a common payment choice, specifically in an online shopping mode.
Consumers may find it convenient to use BNPL finance, but there may also some associated drawbacks.
For purchases made through participating merchants, a variety of firms, such as Klarna and Affirm, provide buy now, pay later financing.
PayPal has launched a point-of-sale instalment financing service of its own.
Similar financing agreements have also been set up by other credit card companies, including Chase and American Express.
How Buy Now, Pay Later Works?
Buy Now, Pay Later All these schemes differ slightly from one another. Although each business has its own terms and conditions, point-of-sale instalment loans typically work in the manner described below:
- Purchaser makes the purchase at his choice of retail partner and chooses the option of BPNL whiling checking out.
- Purchaser pays a small down payment, for example say 20% of the total purchase cost, if its accepted (purchaser is intimated in a matter of seconds).
- The balance that is pending is then paid through an installment which is of interest-free.
- Payments modes can be by cheque or bank transfer, the other option is it can also be automatically debited from buyers debit card, bank account, or credit card.
Both Credit card and BNPL has the facility of delayed post payments, BNPL however is distinct from credit card while making a transaction in the sense that buyer only requires to pay the minimum monthly payment due on his credit card when he uses it to make purchases. Until the balance is paid in full, interest will continue to accrue on the outstanding balance. The balance, however, can be maintained indefinitely. (With the exception of when a card with a 0% introductory APR is used.)
When using a BNPL, there are frequently no fees or interest charges, unlike when using a credit card. However, there is a planned payback schedule in place, which ordinarily lasts a few weeks or months. Buyers would always be informed up front of the price they must pay, which was typically close to the same amount. It resembles taking out any unsecured personal loan or consumer loan in many ways.
Although not all purchases made by customers qualify for the pay later financing option. Of course, there may be restrictions on how much can be financed in this method. But with the growth of e-commerce in general in 2020, buy now, pay later became a more common option for paying for smaller online transactions.
Are there any Credit Checks for Buy Now, Pay Later?
In order to obtain financing, the majority of BNPL enterprises just require a mild credit check, which incidentally has little impact on the buyer’s credit score. Even so, a few BNPL partners might validate the buyer’s credit, which could have the temporary effect of lowering a few credit points.
There have been certain instances where the buy-now, pay-later loans have also been reported to rating agencies. If such credit provider submits this details to credit rating agencies, the loan information will show on the buyer’s borrowing reports, which could incidentally lower portion of credit score.
Fun Fact 1
In an Interesting find from the year 2021 the Straw Hecker Group found that 39% of Americans said they had used BNPL at least once.
Any Special Considerations for Buy Now, Pay Later?
The question that remains is if there are any considerations that should be made before signing a BNPL agreement.
First and foremost, it’s crucial to comprehend the repayment conditions you’re committing to. Once more, these can vary depending on the who the services as the buy now, pay later prvider. For instance, certain businesses could demand that you settle the outstanding sum with biweekly payments spread out over a month. Others may permit you the option to pay back items over a period of three months, six months, or even longer. Additionally, your interest rate, if there is one, may change based on the terms laid of in the loan.
It’s also necessary to know how your payments will work so that you can plan for them in your budget. This ensures that you are able to not only afford your payments but also make them on time. Missing a payment for a buy now, pay later agreement could result in late fees. Your late payment history could also be reported to the credit bureaus, which could hurt your credit score.
Fun Fact 2
The percentage of customers who indicate they tend to spend more while using buy now, pay later than they would when using other payment options is 55%, which is an very interesting finding.
In addition, it should be impeccable to highlight that you might not be approved for a point-of-sale instalment loan with a 0% interest, despite the possibilities. Platforms that allow you to make buy now and pay later could charge interest on those buying that is either comparable to or more than the interest that would be applicable with a standard credit card. Additionally, unlike a credit card, buy now, pay later transactions do not have a any mechanism where you can earn rewards points.
Buy now, pay later may have restricting on your ability to exchange an item and return policies. The vendor may permit a return, but you won’t be allowed to back out of the “buy now, pay later” arrangement unless you have proof that the return has been authorized and handled.
What are Pros and Cons of Buy Now, Pay Later
In a Buy Now,Pay Later the financing agreement is such that it gives a mechanism where buyers can pay fr goods without any intereest in a later period.In case if you still are turned down with a poor credit score fr a loan alternative it is still possible to get authorized for this kind of financing mechanism.The advantage of BNPL is the your credit card debt remains unaffected even if the loans increase your persnal loan debt.
Usually there is n impact on the credit score because they have a very short duration to be recorded to the credit agencies.
One of the disadvantage of using BNPL is that it doesn’t help in building a good credit (like the usual conventional alternative do), Also many there benefits such as cash back offer accumulating reward points are not available.
The other point t note is that refund of an item brought through BNFL is very complicated prcess.Usually there is a delay in getting the money since the merchant has t inform the BNPL lender for the refund. Till the time the refund is materialized the part payment has t be done regularly. If for any reason its not done in that case it may be marked as missing or default and then penalties r late fees has to be incurred which ultimately effects the credit score.
Pros
- Easy method of making payments over time
- Almost zero-interest or lower interest compared to credit cards
- Qualification doesnt need a generous high credit score
- Approval process is Fast
Cons
- Tracking of payments is difficult
- Overdue payments result in late fees and reduces credit score
- No Incentives of cash back rewards for purchases
- Refund process would still mean Payments may continue
The Final Conclusion
With BNPL, customers are able to buy the product immediately and get ample time to make payment.
In BNPL If you can’t or don’t want to pay for something all at once, financing could sound as a good option.
BNPL loans increase your credit limit keeping the interest rates lower, this is achieved with a repayment schedule to prevent you from having a backlog of continuous debt. Point to be noted is that Weather these payments are manageable and what would be the consequences in future if you are unable to pay. In order to abide by the terms to which you are agreeing, carefully read instructions on buy now, pay later finance.
Final Conclusion is in considering the benefits of getting loan payment in interest free installments against the advantages of using other options instead such as credit cards or personnel loans.