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Buy Now Pay Later: How Does It Work?

Want to get a head start on your Christmas shopping this year? It might be a good idea, given the widespread disruptions in the supply chain.

Disruptions mean rising costs and many consumers are wondering how they will be able to finance these purchases. One popular solution that shoppers are turning to is “Buy Now, Pay Later” loans or BNPL. This financial product enables customers to break up the cost of their purchases into installment payments. They are usually due every couple of weeks.

According to a survey by Affirm, 56% of consumers were interested in using BNPL to finance their holiday shopping. And in recent months, retail giants such as Amazon, Target, and Walmart have tapped into this goldmine of opportunity and have developed partnerships with BNPL providers like Sezzle, Affirm, and Zip. 

How, Exactly, Does Buy Now, Pay Later Work?

With BNPL, one thing to note is that all companies will offer this program differently. Every company has laid out its very own terms and conditions. However, there are some general ways that they all operate. Here are some guidelines as to how they work:

  • You make a purchase at a participating retailer. At checkout, you have the option of choosing the BNPL option. 
  • If you are approved, you are required to make a small down payment. It could be just 25% of the total purchase amount. 
  • You are then required to pay the remaining amount in a series of interest-free payments. 
  • You can pay by using a check or bank transfer. Payments can also be automatically deducted from debit, credit card, or bank account. 

It may seem that both BNPL and credit card purchases are similar as they both allow delayed payments, however, they do work differently.

When using a credit card for your purchases, the basic requirement is to make the minimum payment due on the card each month. And unless you hold a credit card with a 0% introductory APR, interest will accrue on the remaining balance until you pay off the balance in full. You do have the option of carrying a balance on your credit card, indefinitely. 

Conversely, BNPL doesn’t typically charge interest or fees. However, what they do have is a fixed repayment schedule. It usually spans several weeks and months. 

At the beginning of the agreement, you are informed of the amount you are required to pay at each installment and it’s usually the same amount. You could see it as the equivalent of an unsecured personal or consumer loan

The majority of BNPL companies only call for a soft credit check for approval. Soft credit checks do not negatively impact your credit score. There are some BNPL companies that do run a hard pull on your credit, which could temporarily bump off your credit score by a few points. 

One thing to note is that not all purchases qualify for BNPL financing. There also could be limits on the total amount that can be purchased via this program. BNPL generally works best for small-scale purchases when shopping online. 

Should You Use BNPL?

BNPL has been an incredible opportunity for consumers who cannot get approved for credit. It has also proven beneficial for those who are struggling to come up with the total cash necessary to make the purchase in one go. 

However, one of the many aspects of BNPL to consider is the sheer ease to overspend above and beyond what one is able to pay back.

There is already a growing percentage of consumers in the U.S. who have missed at least one installment payment. This easily translates into late fees and even interest charges. 

It is best to approach this spending option with caution, since, at the end of the day, it is still a loan. 

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