Buy Now Pay Later (BNPL) is a financing option used by some people when shopping in stores or online. If managed well, this financing option is a quick and cheap way of accessing credit. This post takes you through how buy now pay later works and how it saves money.
What Is BNPL?
This short-term financing option enables buyers to purchase goods and pay for them in the future, usually interest-free. This system is increasingly popular, particularly in online shopping. Firms that offer BNPL include Laybuy, Clearpay, and Klarna.
How BNPL Works
You use buy now pay later apps to shop online and make payments later in monthly, bi-weekly, or weekly installments. Although these apps often have interest free periods, sometimes they charge interest just like a credit card. You avoid paying interest by clearing the balance before the interest-free period ends. BNPL has high-interest rates.
The common BNPL apps include Gday, Afterpay, FuturePay, Klarna, Affirm, and PayPal credit. These apps are usually available at most online retailers’ checkout pages. Platforms like Gday Loans also connect borrowers with suitable lenders who offer buy now pay later loans with favorable terms.
An interest-free BNPL offer possibly splits a purchase into four equal installments. You pay the initial one at checkout and pay the remaining bi-weekly.
Does BNPL Affect Credit Ratings?
This financing option can hurt your credit, and it hardly ever improves it. Several buy now pay later apps do not perform hard inquiries on your credit report, and most of them never report timely payments to the credit bureaus. Thus, as long as you make on-time payments, it will not affect your credit score or surface on your credit report.
Nevertheless, some apps report late payments. If you default on your debt payment, most BNPL apps also terminate your account and insist that you pay the balance in full instantly. If you fail to do so, the firm sends your debt to collections, which severely hurts your credit rating.
Is It Wise to Use a BNPL App to Make Online Purchases?
These apps have good deals on several occasions, provided you clear your balance on time. However, there are some pros and cons to be aware of when using the apps.
Pros of BNPL Apps
Fast and convenient: BNPL apps are very convenient since they do not require separate applications. Many online retailers have built-in payments within their sites. It is as simple as keying in your credit card details.
Interest-free offers: BNPL apps offer interest-free periods, which you take advantage of to avoid paying high interest.
No hard pull on your credit: Most apps will not perform hard credit checks when you open an account. Several inquiries are believed to pull down your credit rating, so ensure you limit the number of inquiries on your report. A few BNPL apps do soft pulls on your credit that do not affect your score.
Cons of BNPL Apps
High-interest rates: The BNPL apps have very high-interest rates for a limited period. You only pay interest if you do not pay off your balance before the interest-free period ends. The interest rates for these apps are usually higher than those of credit cards.
Penalties for late payment: There is a late fee penalty if you do not make timely payments. Even though they are reasonable flat-rate fees, they accumulate over time, so ensure you make on-time payments to avoid additional charges.
Also, take note of deferred interest offers on the apps. If you do not clear the balance fully before the offer period ends, you incur interest fees on your account from the initial purchase date, which are very costly.
Low credit limits: While some BNPL apps allow for purchases of over a thousand dollars, others are only meant for smaller purchases of a couple of hundred dollars. Nevertheless, you get higher limits with a credit card if you have a decent income and a good credit score. Just ensure you do not make huge purchases on credit cards to avoid incurring costly interest fees that bury you in debt for a long time.
Do not boost credit: Most BNPL apps do not report timely payments to credit bureaus, so you will not build your credit even if you pay off your balance on time.
Bottom Line
BNPL enables you to pay for your items over an extended period and helps you save money. However, be wary of accumulating debt for unnecessary purchases.
