What’s buy now, pay later?

How does BNPL work?

Consider this hypothetical scenario: You’re shopping online and decide to buy a $500 TV. When you proceed to check out, you may be offered the option to purchase the TV by making four payments of $125. You’d pay the first $125 now and get to enjoy the TV while you make the subsequent payments based on a predetermined schedule. Think of it as reverse layaway. At that moment, you have a choice to make: Do you choose the BNPL option or a different payment method, such as a credit or debit card?   

Reasons you might consider BNPL

BNPL can be a way to extend your budget, helping you spread out the cost of an item over several weeks or months. And in many cases, the payments are interest free, unlike credit cards, where interest typically accrues until you pay the balance in full. So if you purchase the TV with BNPL, your total out-of-pocket cost will likely be $500, assuming you make the payments on time.  

Potential disadvantages of BNPL

While the idea of interest-free payments may be appealing, you’ll want to weigh this benefit with the potential drawbacks of using BNPL to help you decide if it’s the best way to purchase your item.

• Merchandise returns—Returns can be complicated when you choose BNPL. Let’s say you decide to return the TV in our example. Depending on the BNPL company, you could still be on the hook for the remaining payments, even when you no longer own the TV. Many require proof of return before they’ll cancel the loan. It’s also possible that the merchant may not accept returns for items bought with BNPL. For these reasons, it’s important to understand both the merchant’s return policies and the BNPL loan terms before you make your purchase.    
• Overextended budget—Like credit cards, the ease and convenience of BNPL can make it easy to overspend and buy things on impulse—things you may not need or really be able to afford. Nearly 70% of surveyed BNPL users admit to spending more than they would if they had to pay for everything up front.¹
• Added debt—BNPL is a short-term installment loan, so you increase your debt each time you use it. And like all debt, you need to put money aside to pay it off, which means you may have less to put toward your financial goals, such as saving for vacation, a new car, or a comfortable retirement. 
• Late fees—Many BNPL companies charge late fees for missed payments, which are assessed as either a flat amount or a percentage of the missed payment. Any late fees you incur take money out of your pocket that you could’ve used for something else and increase the total cost of your purchase. For example, assuming a $10 late fee, the total cost of your $500 TV might be $510 if you miss a payment.     
• Payment tracking—Using BNPL regularly can make it hard to keep track of the amount you owe and when each payment is due. Forty-two percent of surveyed BNPL users say they’ve made a late payment on one of these loans.¹ If BNPL is (or becomes) one of your preferred payment options, you may want to consider creating a spreadsheet to help you stay on schedule, avoid late fees, and manage your budget.

BNPL vs. credit cards

Since both BNPL and credit cards allow you to pay for items over time, you may be wondering why you might choose one over the other. While these payment methods are similar, there are some distinct differences, which could influence your decision.  

Factors to consider when deciding how to pay

The payment method you choose at checkout will depend on many factors, including your personal preference, financial circumstances, and the cost of the item. Here are some questions that can help you decide if BNPL is a suitable option for your purchase or if it would be better to use a credit or debit card—or even cash, if you’re shopping in a brick-and-mortar store. 

• Is the item a need or a want? A need is something that’s essential for your daily living, and you can’t put off buying it until you save enough money. In these instances, paying with BNPL or a credit card may be appropriate. A want is something you’d like to have such as a new gaming system or a new outfit. You generally don’t want to go into debt for these items. Additionally, you may want to consider leaving them in your online cart for a day or two to avoid impulse buying.      
• How much is your existing debt? Can you afford to take on more? If you don’t have the funds to make timely BNPL payments, it may not be an appropriate choice. You might also consider delaying the purchase until you have the money to pay the full amount up front.
• Do you pay off your credit card balance in full every month? If so, you’re not paying interest on your purchases, which means you’re likely already benefitting from one of the main reasons people choose BNPL.
• What are the terms for the BNPL loan? There are many BNPL companies, and each has its own rules regarding payments, interest, late fees, and returns. You’ll want to review the terms and conditions before selecting BNPL to make sure you understand what you’re agreeing to. For example, some companies may require automatic payments from your bank account, which means you’ll need to make sure you have enough money in your account to cover them.  

Be a savvy shopper

It’s important to consider all your payment options and whether an item is a want or a need to help you make the most of your money each time you shop. You want to choose the method that best fits your budget at that time and won’t hinder your financial goals. In some cases, this may be BNPL and, in others, it may not.