Undoubtedly you’ve seen them: badges on an e-commerce shopping cart advertising how easy it is to split your payment into installments. You’ve probably felt tempted by their promises, even if you’ve never bitten the bullet. Companies like Affirm, AfterPay and Klarna are some of the most popular Buy Now, Pay Later (BNPL) programs around, and they have a vested interest in convincing you to finance your purchase over time.
But should you? Should you use BNPL and possibly fall into the same credit trap that you’d hoped to avoid by not using your credit card? Approach the question like the wealthy, and you’ll realize that BNPL can actually be a blessing in disguise.
What is buy now, pay later (BNPL)?
BNPL is a type of short-term financing that allows customers to purchase items and pay for them in installments over time. Also referred to as point-of-sale loans, BNPL are convenient for online shoppers, usually requiring an upfront payment and then billing your credit or debit card in equal installments for the remainder.
BNPL plans can charge interest and late fees, so many customers might ask themselves what the difference is between using BNPL and a credit card. Credit cards typically allow you to charge the purchase amount and then pay off the amount owed over time. So long as you pay the minimum credit card payment amount, you can theoretically pay for your purchase in as many payments as you desire. Interest will accrue on the remaining amount until you pay it off in full, unless you’ve used a card with a 0%-APR introductory interest rate.
BNPL, on the other hand, sets a fixed number of payments at the onset, generally over several weeks or months. You’re told at the beginning how much each payment will be, and if you fail to pay, you’ll be in for hefty late fees.
What are the benefits of BNPL?
BNPL is convenient for customers looking to finance a large purchase from the get-go. Firstly, BNPL does not run your credit. They conduct what’s called a “soft check,” whereby the company checks your eligibility without affecting your credit score. This may prove advantageous for customers who do not wish to use their credit card or don’t want to get one to finance their purchase.
BNPL often offers a range of payment plans, and many BNPL companies offer zero-interest options. Normally these zero-interest plans are the ones with the shortest number of payments, ranging from three to four installments.
What are the disadvantages of BNPL?
On the other hand, BNPL may make it too easy to buy on credit. According to The Strawhecker Group, 55% of consumers spend more when using Buy Now, Pay Later plans than they do using a traditional credit card.
While a credit card aggregates your purchases and shows you the full amount you have outstanding to pay, it can be difficult to keep track of BNPL amounts owed. Unless you always use the same company to buy BNPL, you might find yourself blindsided when it comes time to pay your prearranged payment. Even worse, the BNPL company you use at time of purchase is usually not up to the customer – it’s offered by the merchant and they choose their partner.
“One in five customers believe their buy now, pay later service would take advantage of them,” said Jared Drieling, Senior Director of Market Intelligence and Insights at The Strawhecker Group. As a result, most consumers think a credit or debit card is more reliable.
How the rich use credit to their advantage
For the rich, managing cash flow is vital and that’s part of the reason why buying on credit can be helpful. Using a credit card and paying it off helps build your credit history and score, so when you go to build a business or buy a house or car, lending companies offer you superior rates and discounts.
The wealthy leverage debt to build their wealth, preferentially borrowing for business or practical purposes rather than to support a shopping habit. First you build your income earner and then you can spend consciously, not the other way around.
In the same way, you can certainly use a credit card to pay for a large purchase. But the caveat is, you have to pay off the credit card when the bill comes due. No minimum payments, no halfsies – you have to pay all of it. Because why should you allow the credit card company to charge you 23.99% interest on your outstanding balance? If you don’t have the funds to pay off the purchase in the first place, you shouldn’t be buying it. Instead, you should go back to basics and focus on increasing your income and savings.
This is where BNPL really shines. If you can’t (or don’t want to) pay your credit card off at the end of the month but you really want or need that item, you can look for a BNPL plan that offers you installments for zero interest. PayPal offers zero-interest, point-of-sale options that divide your $30+ purchase into 4 installments, due every two weeks. Affirm, AfterPay and Klarna also offer 3-4 installment plans with zero interest.
If you must use a credit card, ensure you’re paying with a card that boasts a 0%-APR introductory rate. Or pay off your card in full at the end of the month.
How to manage your BNPL purchases
Of course, entering into a BNPL purchase agreement with zero interest only helps in managing your cash flow by extending the period during which you have to pay for your purchase. It doesn’t help solve the issue of overspending.
You can manage your BNPL purchases by downloading each BNPL company’s app or checking on their website, but an easier method is also simpler: only enter into one BNPL plan at a time.
Don’t think of BNPL as a crutch to pay for everything with no interest charged. If you keep using BNPL at every merchant, you can easily lose track of the amounts owed, when they’re due and then, if the payments pile up, you may miss a payment and end up with a late fee.
Instead, try to view BNPL as a way to improve your cash flow (for free). Most BNPL programs offer a “Pay in 4” option now, where they divide your purchase price by four and require payment every two weeks. That means you can essentially pay for your purchase over two months, cutting the amount of the disposable income you would have spent that month in half. Best of all, should you no longer need that extra time, you can simply log in to the BNPL website or app and pay off the loan amount penalty free.
Limit yourself to one BNPL plan at a time to keep your spending in check and pay it off before entering into another loan installment agreement. You’ll thank yourself later.
Bottom line
Buy Now, Pay Later (BNPL) is a type of short-term financing available at checkout. While customers often complain that BNPL makes it too easy to overspend, BNPL doesn’t run your credit and offers the added benefit of plans that charge zero interest. BNPL may not be for everyone, but for those who need or would like to improve their cash flow, paying for a large purchase in short-term installments, BNPL could be a smart financial choice. However, when it comes to using BNPL, it’s best to be strict and only enter into one agreement at a time.
