BNPL in action
Let's say your social calendar is filled with weddings and events in the next month, and you have nothing to wear. You head to your favorite fast-fashion store online and load up your cart with two cocktail dresses and a pair of shoes. The total with tax comes to $239.91.
In the checkout process, you see an option for PayPal Pay in 4. You are directed to log into PayPal, and you see that you're preapproved for four installment payments of $59.98. Although the loan is interest-free, you do pay an extra $0.01 due to rounding. Accept the offer, and you'll make the first payment immediately. The remaining three installments are due every two weeks.
You may also see an option for extended financing with interest. A short-term purchase loan from PayPal will have a fixed interest rate ranging from 9.99% to 35.99%, depending on your credit. PayPal will suggest a loan term, such as six months, and show you the monthly payment amount. At a midrange annual percentage rate (APR) of 22%, a six-month loan of $239.91 will cost you $15.66 in interest.
If you prefer to shop in-store, you can secure financing with an app like Affirm. You'll create an account in the app and provide your income and identity details. The app then calculates your credit limit. After you select a store and share the purchase amount, you'll see your financing options. Choose one, and the app generates a single-use barcode or credit card you'll use to pay at the register.
Whether you're shopping online or in-store, the BNPL process is easy and quick -- which is good and bad. An interest-free loan can help you manage your cash flow and reduce the budgetary sting of a big purchase. But once you're in the BNPL system, those pricey interest-bearing loans are just a few clicks away. Those are best avoided since the interest charges can easily break your budget and deplete your savings account.
