What is Buy Now Pay Later? This is likely the most common question we get asked all the time. In this article we are going to explain what Buy Now Pay Later is, what it is not, how it works, and why BNPL is a good option typically for the average consumer.
What is Buy Now Pay Later?
Buy now pay later is an agreement between a buyer and seller in which the buyer agrees to pay for a purchase over time, typically using monthly installments. The agreement is usually made through a third-party provider such as PayPal Credit, Klarna, Afterpay, Affirm, etc. The seller agrees to sell the product or service and the buyer agrees to pay using a preset monthly payment schedule. The buyer pays the full price up front, but it is paid over time on the agreement of the seller.
Most big retailers have their own buy now pay later schemes, like Amazon, eBay and Starbucks. Many companies may use the buy now pay later apps from third party providers of which there are many.
Buy Now Pay Later (BNPL) financing options typically allow consumers to buy items and have the money transferred directly from their bank account over a period of time. With BNPL, customers can save money by paying for items, products, and services over time instead of all at once. BNPL offers several advantages, including convenience and security.
In general, BNPL works like this: a customer chooses a product or service and gets that item immediately. They typically need to make a first installment payment upfront and then agree to paying the rest over a period of time. Different BNPL companies and apps will have different terms. It depends on the product, service, retailer, amount and what the buyer agree to.
How does Buy Now Pay Later work?
The buyer makes a purchase and then pays for it in installments over time. The total cost of the purchase is divided into equal payments that are due each month. For example, the buyer might pay $25 per month for 12 months. The buyer’s monthly payments are due on each of the first four days of each month. When the buyer pays a monthly payment, the seller is paid.
Does Buy Now Pay Later have Interest?
The interest rate on a BNPL purchase varies from retailer to retailer. The majority of stores offering BNPL as a payment option have no interest at all, while others charge some interest. Generally most of the BNPL services we see have zero interest.
So it’s important that you check the terms and conditions of each BNPL payment plan before choosing BNPL as a payment option for any service.
What are the benefits of Buy Now Pay Later?
In general BNPL is ideal for a lot of reasons. Chiefly that it allows for consumers to spread out the cost of everyday items, such as clothes, over a period of time without interest. BNPL companies and apps also offer loans on lower value items and credit for those that normally wouldn’t qualify for credit cards.
It is estimated there are about around 50 million Americans without credit scores. Access to credit is important for a lot of reasons, specifically for getting loans for higher value items such as purchasing a house or buying a car.
A majority of the 50 million Americans without access to credit are from underrepresented groups. This includes African-Americans, Hispanics, and those in poverty. To get approved to a loan from a Buy Now Pay Later company, generally you only need to show that you have a steady job with a paycheck. That’s why for a lot of groups and communities BNPL has taken off.
BNPL companies also do not “hard credit checks” which affect credit scores when determining to offer a loan to a consumer. They use “soft credit checks” which do not hurt a credit score or show on a credit record.
The biggest advantage of BNPL, it can be a great way to spread the cost of larger purchases over time with no interest.
What are the Disadvantages of Buy Now Pay Later?
When a consumer is considering whether or not to use a buy now pay later service, they really need to consider whether they can afford the item over the payment period. The main problem we have here with using a buy now, pay later service is that it can lead to overspending and debt.
Most BNPL services have a set schedule for the payment plans and loans they offer. Typically this can not be changed or altered. This can be a challenge if a customer of a BNPL service gets into trouble financially.
Also a lot of BNPL loans people use credit cards and not debit. This obviously can cause issues since the payments could compound if a consumer doesn’t pay off the credit card debt from the BNPL plans.
Another issue with BNPL is that may not help consumers build their credit history. DineroLabs can’t speak for every single BNPL company, but most do not provide information to credit reporting agencies.
This is a bit of a Catch-22 for some people. For those that make on-time payments and you want this reported as it can help improve your credit score. This helps build a positive credit history, which can lead to better interest rates on mortgages, car loans, and other types of financing in the future.
If you don’t make timely payments, they yeah BNPL will help you out here. Since that information is not reported to a credit agency, you have a bit of wiggle room here.
Another clear benefit of BNPL is that it can help consumers save money. Most BNPL companies have no interest rates on financing plans for the products you purchase through them. This is of course better for consumers would pay for traditional credit cards and have a traditional terribly high rates on them.
Final Thoughts on BNPL
BNPL is the latest payment method is gaining in popularity and will continue to grow in the next few years, as it offers several benefits for both buyers and sellers.
Here are my final thoughts on BNPL:
1. BNPL is a great way for buyers to spread the cost of their purchase over several months, without having to pay any interest or fees.
2. It also allows them to buy items that they may not be able to afford otherwise, as they can split the cost into smaller payments.
3. For sellers, BNPL is a great way to increase sales, as it encourages more people to buy items that they may not have been able to afford otherwise.
4. BNPL also allows sellers to sell items at a discounted price, as they are able to spread the cost of their items over several months.
5. BNPL is very simple to set up, and it only takes a few minutes before being approved for payment.
6. It’s a great advantage for consumers to get access to credit without the hassle of it affecting a credit score.
7. We will only see the entire BNPL ecosystem grow and we are even seeing business-to-business players in the space.