icon of two gears to show concept of expanded lessons Expanded Lesson 5 min read

Buy Now Pay Later (BNPL) Services

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If you buy something online or on your mobile device, you might see the option to “buy now and pay later.” This feature allows you to buy the item right away without paying the full price upfront. These services may help break up larger payments into smaller, more affordable ones, but can also encourage excessive spending. Learn more about buy now pay later services and how they can affect your finances.

Online shopping with cell phone using buy now pay later service.
Yellow notepad with pen svg icon Lesson Notes:
  • BNPL services have become a popular online payment option that more online retailers are adopting.
  • Instead of paying in full at checkout, you can make a partial payment and then repay the rest over a set period of time.
  • This can help you save money in the short term, but you may incur additional fees if you fall behind on payment.

What is Buy Now Pay Later?

BNPL plans are a type of installment plan or short-term financing that allows a buyer to make a purchase without having to pay everything upfront. Instead, the shopper will split up the full price of their purchase into fixed weekly or monthly installment payments until the bill is paid in full.

Third-party lenders and BNPL companies will provide this type of service to online retailers that are looking to make larger purchases more affordable. This is an appealing option to many shoppers since it allows you to split up larger purchases into smaller, more affordable payments, often interest free.

How Do Buy Now Pay Later (BNPL) Services Work?

At checkout, you may see the BNPL option when selecting a payment method. The lender will advertise their services by showing you a lower price.

Once you select this option, the company will give you a rundown of your payment plan, including how much you owe and when it is due. Your first payment may be due when you check out or within a few weeks of the purchase.

For example, if you are interested in buying an item for $50, the lender may list the price at four payments of $12.50. That means you will only be charged $12.50 now, with your next payment scheduled for several weeks down the line.

Most plans consist of interest-free installments over the course of weeks or months, which gives you more time to pay for the item in question. However, you may incur a late fee if you fall behind on payment.

You typically need to be at least 18 years old and have a bank account, credit or debit card to sign up for a BNPL plan.

Read through the terms and conditions to make sure you understand the installment plan and can afford your installment payments. Use good money management and do your due diligence by reading the section about late fees, penalties and the arbitration clause to see what happens if you can’t make a payment.

How do Buy Now Pay Later Companies Make Money?

One of the biggest draws of using a BNPL service to pay for your purchase is that you’re not charged interest on your installments.

You may be wondering how the BNPL companies make money if they don’t charge interest. The way that BNPL companies make money is by charging the retailers or merchants fees for processing the payment.

This is already a common practice for credit card transactions, where the credit card companies will charge the merchant 1%-3% of the purchase price. BNPL companies usually charge more for their services, ranging from 4%-9% per transaction.

While the cost may be higher than other payment methods, retailers may be willing to pay more for this method if it brings in new customers that wouldn’t have bought the product if they had to pay it all upfront. Some merchants may also be passing on a portion of this added cost to the consumer by raising their prices.

Is It a Good Idea to Buy Now Pay Later?

Buy now pay later services can help you buy the items you need now instead of waiting until you have more money in the bank. This can be a lifesaver if you need something right away, such as supplies for work, childcare equipment and other large consumer purchases that can’t wait.

Buying now and paying later can also help you preserve your savings in case of an emergency. You can keep more money in the bank in case you need to purchase more items or pay your bills in the near future. If you are having trouble paying your bills, you can sign up for an installment plan to save money now so you can pay off the debt with interest in time.

However, when using BNPL services, you need to make sure you can afford the installment payment. Make sure you can still afford to pay your bills and other essentials, like housing, utilities, transportation and food.

BNPL services may be difficult to track if you use them across multiple purchases. This could lead to you having multiple auto drafts from your bank account or credit/debit cards, adding up to a significant amount every month.

Installment plans tend to be common for non-essential items like luxury clothing, electronics and furniture. If you don’t need this item and can’t afford to pay for it outright, consider waiting until you have more money in the bank.

Taking out an installment plan isn’t the same as applying for a loan. Most installment plans don’t require a hard credit inquiry, which can lower your credit score. Some plans may do a soft credit inquiry to help determine eligibility.

However, more credit reporting agencies say they will start adding BNPL services to consumer credit reports. If you fall behind on your installment plan, it may be sent to collections, which will likely have a negative effect on your credit score.

You may also have trouble returning the item in question if you bought it through a BNPL service provider. Double-check the retailer’s return policy to see if you can still return the item if you aren’t happy with your purchase.

These loans may not have the same protections as credit cards and personal loans. You may still be on the hook for payment even if the item turns out to be defective or a scam.

New installment plan providers are popping up all the time, and some may be more trouble than they’re worth. Research the lender in question to see if they have a good reputation when working with consumers and retailers.

Online shopping is easy and convenient, and you’re bound to see buy now pay later services just about everywhere you go online. BNPL services can help you make large purchases more affordable but can get out of hand if not managed correctly. Be responsible with your BNPL purchases and make sure that you’re not over-extending your budget.

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