If you shop online, you've probably run across a Buy Now, Pay Later (BNPL) option. BNPL is an interest- and fee-free way to break the purchase price down into (typically) four smaller payments, with the first 25% due on the day you buy. The remaining three payments are normally due bi-weekly, at which point your purchase is paid in full. Whether you're receiving a guaranteed income like Social Security or just starting out in life, BNPL may provide you with a payment plan that works for you.
With major players like Affirm, Klarna, Afterpay, Zip, and Sezzle offering the service, BNPL has become so popular that the industry is expected to bring in $125 billion by 2027. In fact, BNPL has become so popular that everyday investors are getting in on the action.
However, like most things in life, BNPL has pros and cons. Here are some of the most impressive features.
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1. No hard credit check
Whether you're working to get your credit score up or don't want to commit yourself to long-term credit, one benefit of BNPL is that it doesn't require a hard credit check. While the BNPL servicer may ask for enough personal information to run a soft credit check (with no effect on your credit score), you don't have to worry about your score being dinged by a hard inquiry.
2. 0% interest on certain options
Typically, BNPL allows you to receive your purchases now, pay over time, and -- as long as you never miss a payment -- pay $0 interest. You want to be careful about making all payments on time, because missing even one could lead to fees and an interest rate as high as 36%. If you still can't pay, you could even face loan default.
However, making sure all payments are made on time can score you a rare, interest-free loan.
3. Split payments
Depending on the purchase price, the typical BNPL plan requires you to make a 25% down payment at the time of purchase, and three additional payments two weeks apart. This allows you to make purchases you might not otherwise be able to afford.
For example, if your total purchase price is $100, you'll pay $25 down. The remaining three $25 payments will be due every two weeks.
4. Could be good practice for budget discipline
If you've never worked with a household budget before or you've run into financial difficulty in the past, a short-term loan through a BNPL service gives you the chance to exercise your budgeting muscles. Knowing that a missed payment could lead to a (very) high interest rate should provide plenty of motivation to ensure all payments are on time.
Payments are normally withdrawn from your bank account or credit card. You must ensure there's enough money in your account or enough credit available on the card to cover the withdrawal.
Note: You may want to avoid using a credit card as your payment source, since failure to pay the card off in full before the next billing period defeats the purpose of an interest-free loan.
5. Can free up money for other purposes
Let's say you're planning for the holidays and want to spread your payments out to allow you to dedicate more of your income to investing. Properly managed, BNPL may help you achieve that goal.
6. Opportunities to use BNPL are on the rise
BNPL purchases are available through more than online-only retailers. Companies like Target, Walmart, and Home Depot also accept BNPL payments.
A word of caution
It's vital to carefully review the details of any BNPL agreement. For example, while most offer interest-free loans, not all do. While many offer fee-free loans, that may not be true for every BNPL servicer. Before committing to a BNPL plan, know what you're getting into.
BNPL may best be compared to the layaway plans earlier generations had access to. The big difference is that when your relatives used layaway, they couldn't take their purchases home until they were fully paid for. Today, you don't have to wait.
