Buy now, pay later (BNPL) refers to the option to purchase items, usually online, with the option to buy it today and pay for it later, whether it is over monthly installments (known as slices) or paying back the balance in full after 12 months.
In many cases, this is like receiving an interest-free loan, with the option to defer payment through a third party such as Klarna, Laybuy, Apple and AfterPay, with some suppliers charging a small fee for the service or a late fee if you cannot make repayment.
Example: Jim goes to buy a new dishwasher and it is going to cost him $500. He can choose to buy the item straight away using cash or a credit card, or he can use buy now, pay later, so he can receive the good today and pay back $500 in 12 months time – or he can pay in 5 equal installments of $100 over the next 5 months. There is no interest if the finance is paid on time. If he misses payment, he gets charged a late fee and interest rates of around 39% APR.
- Buy now, pay later allows you to buy something today and pay for it at a later stage
- It is offered on a number of eCommerce websites and run through a third party such as Klarna or Laybuy
- Buy now, pay later should be interest-free if you pay it off on time
- The companies do not usually run a credit check on you when you use it
What Can You Use Buy Now, Pay Later For?
Buy now, pay later (BNPL) can be used to buy almost anything online, but it is particularly popular for household goods or things bought through catalogues – and it is used most by Moms, young families and young people, with a recent study showing around 30% of all 20 to 30 years using it at least once per year.
Products that you can use buy now, pay later for include:
- Kitchen appliances
- White goods (refrigerators, washing machines etc)
- Alcohol and champagne
- New kitchens and furniture
What is The Interest Charged on Buy Now, Pay Later?
Buy now, pay later is designed to be interest free and pretty much the amount of the good itself. There is interest rates of around 30 % to 39% APR charged per month if you are unable to make the repayment and there is often a one-off late fee, which can be small such as $7 one-off fee (by Klarna) and $8 (by Afterpay) or they may charge 25% of the order amount, which can be a little steeper. These are one-off fees and will only be triggered if the supplier has tried to collect from the customer on two occasions and it has failed.
In terms of the business model, it works very similar to a credit card, which is also essentially free assuming that you pay it all off on time. But the companies make their money by charging those that default, which is usually around 10% to 20% of the customers involved.
What Are The Benefits of Buy Now, Pay Later?
Easier for everyone involved – Buy now, pay later is a very good offering for all parties. For the consumer, it is always a pleasure to get something immediately and worry about payment later, regardless of whether you have the means or not. Particularly for around 20% of the population who live pay check to pay check, this is certainly welcomed. BNPL is also great for any retailers, since it helps generate more sales and they receive the same income regardless and sometimes a kickback from the BNPL partner. And for the BNPL company, they obviously hope that the more sales they make, the better chance there is of generating revenue if anyone does not repay.
Can be interest-free – Buy now, pay later when executed perfectly by a customer means that it is paid on time and therefore it is 0% interest, which makes it cheaper than any kind of loan or credit card. You receive the good today and pay for it in a couple of months or 12 months time. For small purchases or gifts this is just a pleasant convenience, but when you are looking at large purchases of $1,000 or higher, this is actually very helpful for cash flow and budgeting around the house.
Considers all credit scores – Whilst a soft credit check is run, this does not rule out people with bad credit histories, so even though you might be declined for certain loans (such as payday loans) or credit cards, you may find more success with BNPL products. Especially if you were planning on using a credit card or loan to buy a good, why not just buy the good directly? Of course, any amount you can spend will be reflected in your credit limit offered by the provider.
Very fast process – Using BNPL is often automated and streamlined, making it fast when buying items online and totally seamless. So it is almost as easy to use BNPL compared to paying with a credit card or something like Paypal.
What Are The Dangers of Buy Now, Pay Later?
Missed payments will result in late fees and penalties – It might be very easy to buy something and then forget about it, although you will still need to pay for in installments or in 12 months time. The danger can be if you buy multiple items and then rack up a debt of $1,000 or more and if you cannot afford it, because you lose your job or have other big expenses, this becomes an inconvenience. The rates and penalties for missing payment are low, so you do not have to worry too much. But if you are facing debt, adding extra to the mix won’t exactly help.
Hard to track all your payments – If you are using multiple BNPL channels, you may accumulate lots of debt and credit and this could be hard to track all in one place. It could be worth making a separate list or making notes, especially if you are budgeting and do not want any random expenses or surprises to pop up.
Payments may continue if the item is returned – BNPL providers and the retailers are not always synced automatically, so if you return something quickly, do not be surprised if you still get hit with the repayments. You may have to send both the provider and the retailer a message and this will be removed of course, but this is not always obvious and many people have made payments without checking their bank statements.
No rewards, miles or cash back offered – When buying through buy now, pay later, you are now getting any benefits that you might typically with a credit card such as air miles, points or cash back. This may not be a big deal if you are not big on the rewards, but if you are buying things worth several hundred dollars and doing this regularly, you are missing out on some points!
Does Buy Now, Pay Later Run a Credit Check on You?
Companies that operate buy now, pay later usually run a ‘soft credit check’ which confirms very basic information about you and then quickly disappears from your credit report. So using BNPL does not negatively impact your credit score in anyway. Having a hard credit search which is common for things like personal loans, will knock down your score a few points, but then bring it back after a short while.
With soft checks, it means that you do not need a perfect credit score to be eligible and you can be approved with bad credit – and this can certainly be advantageous for many.
Each operator runs affordability checks too and will propose a credit limit that you can spend, so that you should not go above your means.
Is Buy Now, Pay Later Regulated?
No, the industry is not regulated, since charging a product for up to 12 months that is interest-free is able to escape any traditional regulation by the SEC or FCA (in Britain). However, there are talks to start introducing some kinds of soft regulation to make customers better aware of the risks if they do not repay and to carry out basic credit checks to ensure that people can afford the items they are purchasing.
What is the Most That You Can Buy Using Buy Now, Pay Later?
With transactions starting from just $10, the most you can purchase through buy now, pay later can vary between providers, the products available and your credit score – but it can easily be $1,000, $5,000 or $10,000 or more for household items or things like jewellery.
How is Buy Now, Pay Later Different to Buying Something on Finance?
Buy now, pay later is very different to buying something on finance. The former is designed for smaller items and purchases that you buy through websites, but buying something on finance is more common for larger purchases in store. Buying a new kitchen or a brand new car is often bought on finance, because you may need a loan to cover such a larger cost. Rather than lasting just a year, something on finance can be 3 or 5 years, or more.
So it is a Good Thing?
Buy now, pay later can be a great thing. It is an excellent addition to buying everyday goods online and impulsive buys too – and who are we kidding – who wouldn’t want to get something today and worry about the financial costs later?
BNPL is great for retailers and sellers who potentially maximise their conversions with these easy-to-use payment process. As consumers, as long as you pay it off on time and can afford to do so, then yes, it is a good thing.
However, as anything, you must approach it with caution and not get too caught up buying lots of things or maxing out your credit limit. By not being regulated, you do not exactly have anyone to complain to if you are overwhelmed and cannot make repayments. So to avoid any late fees or penalties, just make sure that you keep an eye on what you buy! And if you already have a credit card with a low interest rate – you can always use this too!