Consumers are increasingly interested in how Buy Now, Pay Later (BNPL) financing can help play a role in their purchasing decisions. BNPL makes it easier for consumers to buy big-ticket items quickly, but few fully understand how the concept works. Although BNPL might look similar to online credit card payments, these providers operate quite differently. There are pros and cons to BNPL depending on how you use it. 

What is BNPL, and how does it work?

A short-term financing option that can help you make purchases online, BNPL allows you to complete a transaction and pay for it later, usually without having to pay interest. This option helps you pay for big-ticket items on your own schedule without having to wait until you have the funds ready. You can also use BNPL in lieu of a credit card, which may charge interest.

BNPL functions similarly to installment loans, albeit without steep interest rates (as long as you pay on time). You agree to make payments over a certain period of time at a set sum and may have to front some portion of the purchase yourself to qualify for financing. This down payment is typically about 25% of the total purchase price. 

How BNPL differs from other forms of financing   

Unlike a credit card, there’s rarely interest on a BNPL purchase so long as you’re making on-time payments. If you were to pay with a credit card, you would have to pay interest on your remaining balance while repaying what you borrowed. BNPL financing options also typically only require a soft credit pull, whereas opening a new credit card usually requires a hard pull.

Why BNPL has become popular?

Big, otherwise unaffordable purchases can be easier to complete by way of BNPL, particularly for those who may not want to use — or do not have — a credit card. One survey found that 58% of Americans say they’ve used the tool to finance a purchase they wouldn’t have been able to afford with traditional payment methods.

According to one report, approximately 60% of BNPL users have previously been denied a purchase due to their credit history or income. Consumers are using BNPL services more frequently, with 54% of users surveyed reporting they use the service once a month or more.

The pros of BNPL

BNPL gives you a significant amount of flexibility in terms of paying for big purchases in installments. Plus, this option can save you on interest payments as well, since most BNPL providers don’t charge interest as long as you’re paying on time.

There are also benefits to using BNPL as far as your credit score and reporting go. Most companies do not report to credit agencies unless you fail to keep up with payments, which means there’s less credit utilization reported on your file. BNPL providers who do a soft credit pull, as opposed to a hard pull, do not end up impacting your credit score by checking your credentials. This option is also easier to qualify for than credit cards or other financing options. 

The cons of BNPL

BNPL is not without its drawbacks, however. The temptation to overspend is high, given that these tools make it easier to pay for big purchases immediately. This can lead some to spend more money than they can afford, even with payment installments. BNPL tools may also charge daily late fees if you miss payments or have insufficient account funds.

Using BNPL usually means making a down payment on your purchase, which you wouldn’t need to do with a credit card. This could be a challenge as it cuts into funds saved for day-to-day expenses or other needs. About 57% of users surveyed regret using BNPL services, citing that items were ultimately too expensive, with over half of users reporting they’re currently behind on a payment. BNPL can sometimes make an expensive purchase feel attainable in the moment, when in reality, it ends up weighing heavily on consumers’ budgets and negatively impacting their finances.

Weigh your options

BNPL tools are an interesting option for people who want to make a big purchase without having to save ahead of time — or for those who would rather not pay via credit card. There are benefits and drawbacks to this tool, however, and it’s critical that you keep both in mind before you check out. Be sure not to overspend, impulse shop, or miss payments. Doing so could harm your financial well-being and your credit score.