Buy Now, Pay Later: Is It Right for You? Pros and Cons Explained

Buy Now, Pay Later (BNPL) programs have become more commonplace in recent years. You’ve probably seen it offered at checkout by retailers or online stores phrased in an enticing way offering to “split your purchase into four easy payments.” It sounds convenient, but is it a savvy financial move?

As we enter the throes of the holiday shopping season—where Americans have already spent over $10 billion through BNPL—let’s break down what BNPL is, its benefits, its drawbacks, and how it compares to other options.

What is Buy Now, Pay Later?

Buy Now, Pay Later lets you purchase an item today and pay for it over time, usually in four equal installments every two weeks. For example, instead of paying $200 upfront for a new pair of headphones, you might pay over four installments of $50, with the first payment due at purchase. Essentially, you’re taking out a short-term loan.

What are the pros of BNPL?

1. It can break larger purchases into more manageable payments.
   BNPL can make large purchases fit more easily into your budget. If you have $100 of discretionary income to spend each paycheck, for example, you could make a $400 purchase without having the full amount on hand. Then, you can split it up over a couple of months with four $100 payments.
2. It can provide interest-free options.
   Some BNPL plans don’t charge interest for their “pay in four” plans. Instead, they may charge you a fixed fee for late payments or charge interest for longer payment plans. You’ll want to make sure to read the fine print and still pay on schedule, of course, but this can be a welcome reprieve from higher interest rates on credit cards.
3. It can be easier to get approved.
   BNPL often requires less credit history than a traditional loan or credit card, making it more accessible for those with limited credit. Some programs also only require a soft credit pull (as opposed to a hard pull), which doesn’t impact your credit score. That said, late payments could negatively affect your credit score, as we’ll get into later.
4. It can provide flexibility.
   For better and worse, budgets fluctuate, especially when we’re faced with surprise expenses. BNPL can be useful for dealing with unexpected costs or spreading out payments during tight months.

What are the cons of BNPL?

1. It can lead to impulse spending and reactive financial management.
   Breaking purchases into smaller payments can make them feel less significant. Spending $100 four times feels easier than $400 once—but it’s still $400 that you might not have spent otherwise, were it not for BNPL options. It can also lead you to buy things you couldn’t otherwise afford, or that you might have saved up for in the past. The smaller BNPL payments can add up over the course of a month, if it becomes a habit, and suddenly you need to account for BNPL items in your monthly budget.
2. Late fees and interest can add up.
   Depending on the fine print and how payments are structured, it could cost you more in the long run, especially if you miss a payment. And according to Motley Fool Money, nearly a quarter of BNPL users end up missing a payment. That means additional late fees and potentially triggers interest that can be higher than many credit cards. You could be better off finding a promotional rate on a credit card that offers 0% APR for the first 12 months.
3. It can hurt your credit score.
   Some BNPL providers report to credit bureaus, which means late payments could come back to hurt your credit score. On the flip side, because of how BNPL programs are structured, you don’t receive any benefit to your credit score the way you would with a credit card or personal loan.
4. It’s not regulated.
   Perhaps because it’s such a new payment method, there isn’t a lot of regulation around BNPL programs. That’s why you can see interest rates as high as 36%.
5. It doesn’t give you rewards or protection.
   If you use your credit card to earn points, miles, or cash back, you won’t see those same rewards with BNPL. You also don’t get the same protections against fraud that a credit card provides.

Tips for using BNPL responsibly

As with most things monetary, using BNPL comes down to your particular financial circumstances. What might be a helpful tool for some people could end up leading to more debt for others. Here are a few things to consider if you’re thinking about using BNPL:

• What are you using it for? Be honest about whether it’s a very intentional use for something you need, or an impulse purchase of something you want.
• What’s the total cost? Ask yourself if you could afford it without BNPL and if you could use that money for something else down the road.
• What does the fine print say? Read closely so you know the fees, interest rates, and if credit pulls or late payments can affect your credit.
• Is it in your budget? Use your proactive money management system and check to make sure you can afford the biweekly payments. You’ll also want to add those payments into your budget, so you’re tracking your finances properly and can account for that new expense.