Buy Now, Pay Later (BNPL) is a type of finance that allows you to purchase an item or service upfront and then spread repayment over several installments. Essentially, you are able to buy the product now and pay for it later – and it is predominantly an online industry. There are a number of companies that facilitate this form of finance including well-known Swedish brand Klarna, PollenPay, Laybuy and more.
What is Buy Now Pay Later Typically Used For?
Buy now pay later is often used for purchasing:
- Electronic goods
- Hotels and holidays
Step To Step Guide On How The Buy Now Pay Later Process Works
Step 1 – Making a Purchase
When shopping online or in-store, you will come across the option to use a Buy Now Pay Later service at the checkout. This option is usually presented alongside other payment methods like credit cards and PayPal.
Step 2 – Selection of BNPL Provider
Choose the BNPL provider you want to use for your purchase. Common BNPL providers include Afterpay, Klarna, Affirm, Quadpay, and PayPal’s “Pay in 4.”
Step 3 – Approval and Setup
If you are a first-time user of the BNPL service, you will need to provide some basic information for approval. This might include your name, date of birth, address and a soft credit check. Some BNPL providers might require a credit check, while others base their approval process on factors other than just credit history.
Step 4 – Splitting Payments
Once approved, you will proceed with the purchase and select the BNPL option. The total cost of the purchase is divided into installments, usually 2 to 4, but this can vary depending on the provider and the retailer. The first installment is typically due at the time of purchase.
Step 5 – Repayment Schedule:
BNPL services offer a set repayment schedule, with equal installments due over a specified period, such as every two weeks or every month. The exact terms vary by provider. The remaining installments will be automatically deducted from your chosen payment method on the scheduled dates.
Step 6 – No or Low Interest
Many BNPL services offer interest-free financing if you make all the required payments on time. However, some providers might charge interest if you miss a payment or extend the payment schedule.
Step 7 – Late Fees
Late payments can result in fees or penalties, so it is crucial to adhere to the payment schedule. Make sure to understand the terms regarding late payments and fees before using the service.
Step 8 – Flexibility
Buy Now Pay Later offers flexibility in managing your cash flow. It allows you to enjoy your purchase immediately without needing to pay the full amount upfront. This can be particularly useful for larger expenses or unexpected purchases.
Does Buy Now Pay Later Have Charges?
Charges depend largely on the BNPL provider as whilst some carry out the service free of cost, others add interest. Costs may also depend on the payment method the customer has chosen, or the length of time the consumer wishes to repay back the money. For instance, some offers allow borrowers to spread the cost over a long period but interest may be high at around 39.9% APR.
Why is Buy Now Pay Later So Popular?
Buy Now Pay Later is very easy to use and tends to have low minimum spends too. Companies have made this type of finance popular amongst younger consumers, with slick ad campaigns often targeting people on social media who may not be able to afford certain items, so this gives them a push to do some online shopping.
Can Buy Now Pay Later Affect Your Credit Rating?
Applying for most Buy Now Pay Later agreements should have no impact on your credit rating as they usually only involve a soft credit check. However, missing repayments can lead to both a penalty fee and damage to your credit rating. A low credit score could then hinder any future applications you make for products such as a mortgage, loans or credit cards.
What Are The Benefits And Dangers Of Buy Now Pay Later?
Buy Now Pay Later has fantastic benefits as it is easy and convenient for consumers and retailers alike, is usually interest free and considers all types of credit scores. However, it can be hard to track all your payments, missed repayments can lead to fees and no rewards, miles or cash back are offered.
Some further benefits and dangers are summarized in the table below:
Benefits of Buy Now Pay Later:
Dangers of Buy Now Pay Later:
|No Interest (If Paid on Time): Interest-free financing is often available if you make all payments on schedule.||Overspending: While BNPL can be convenient, it is important not to overspend beyond your means.|
|Convenience: BNPL offers a streamlined checkout process, and you can manage your payments through the BNPL provider’s app or website.||Late Payments: Missing payments can lead to fees and negatively impact your credit if the provider reports to credit bureaus.|
|Budgeting: Splitting payments can make budgeting easier, as you know exactly how much you need to pay and when.||Interest and Fees: Some BNPL services do charge interest or fees for missed payments or extended payment schedules. Make sure to understand the terms.|
|Accessibility: BNPL services might have more lenient approval criteria than traditional credit options, making it accessible to a wider range of consumers.||Impact on Credit: While some BNPL providers don’t perform hard credit checks, others might. Check the provider’s policy to understand the impact on your credit score.|
Buy Now Pay Later is a flexible financing option that allows you to make purchases upfront and spread the cost over time. It is important to read and understand the terms, adhere to the payment schedule, and use the service responsibly to avoid late fees and potential financial pitfalls. If used wisely, BNPL can be a helpful tool for managing expenses while maintaining financial control.
Justine is a full-time writer with lots of expertise and a wealth of experience in the financial world. In particular, she specializes in household income and consumer finance across the United States. Follow her articles for useful advice and top tips, guides on how to save money and lots more.