For many consumers, the ease and flexibility of spreading payments over a longer period “Buy now, pay later” or BNPL, tempting plans.
Add to that the possibility of lower interest rates and BNPL is becoming an increasingly popular alternative to using a credit card. According to a 2021 study by C+R Research, 56% of BNPL users surveyed said they preferred using BNPL over credit cards for these and other reasons.
BNPL certainly has advantages over credit cards for certain consumers in certain situations. But credit cards have advantages in others. Which option is best for you depends on several factors, including how much you’re spending, the cost of paying off the debt, and how quickly you can pay it off.
Ask yourself these questions to determine which option, if any, is right for you.
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How much can I afford to pay upfront?
Most buy now, pay later options require you to pay part of the total purchase up front, while the rest is split into equal installments that are due over a set period of time – usually six weeks. This popular “Pay in 4” model is offered by most of the biggest BNPL services, like Afterpay and Klarna.
Having to pay upfront for small purchases might not affect your immediate cash flow, but for larger purchases it can be difficult to manage. For example, if you make a buy $2,000 with borrow now, pay later, you’ll pay $500 immediately up front. And the higher the total amount of your purchase, the higher the amount required to be paid at checkout.
Also, if you take out more than one of these loans at once, you could end up shelling out more money than you can afford. (For example, four $1,000 loans at around the same time require $1,000 in total upfront.) users said they don’t fully understand the ramifications of missing repayments.
Like BNPL loans, credit cards can also help consumers make purchases for which they do not have immediate cash. But one of the biggest differentiators is that when you make a purchase with a credit card, you won’t have to pay anything upfront. So if you charge a purchase of $2,000 to a credit card, that amount will be added to your card balance, a portion of which will be due at the end of the monthly billing cycle. (More on that below.) Because you don’t have to pay upfront when you make your purchase, paying with a credit card can reduce the initial financial burden of reimbursement.
How long will it take me to pay for my purchases?
If you make your BNPL payments on time and pay them in full, you won’t have to pay interest or late fees. But if you miss your payments, you may be charged late fees and your debt could be sent to collections.
Similar penalties apply for missed credit card payments: Late payments can result in interest and late fees, and can negatively impact your credit score. However, an important distinction between the two financing options is that although you will only have a set period of time to repay a BNPL loan, you can carry over credit card debt from month to month. .
Credit Card Considerations
While it’s a good idea to pay off your balance in full each month to avoid incurring interest, larger purchases with credit cards may require you to hold a balance and pay it off monthly. But unlike most buy-now-pay-later loans, there’s no set time frame in which you’re required to repay your entire purchase. Instead, at the end of each monthly billing cycle, you’ll have a balance, which you’ll have to pay a monthly minimum, plus interest. This minimum will vary depending on how much you owe and your interest rate – usually 2% to 4% of your total balance, or a fixed amount between $25 and $35 if your balance is low.
Remember, however, that when you carry over your credit card balance and don’t pay in full, you will be charged interest, which can be high depending on your creditworthiness and the amount of your debts. Additionally, failure to pay the minimum monthly payment due can result in an APR penalty, which is an increased interest rate, and can also negatively impact your credit.
To note: If your purchase is particularly large and will take some time to pay off, consider a 0% APR credit card. These options come with promotional periods, usually ranging from 12 to 18 months, during which you will not be charged interest. This can potentially be a better option than going into debt on a buy-now-pay-later loan. Note, however, that 0% APR cards generally require good to excellent credit scores to apply. And once the interest-free period ends, you will be responsible for paying the card’s then-current interest rate on new purchases, as well as any remaining balance from the promotional period.
With a typical “Pay in 4” buy now, pay later model, borrowers must pay 25% of the purchase up front, then the remaining 75% in three installments over a six-week period. Such short repayment periods can not only make it easier to default on the loan, but it also means that you will have to pay larger sums. A minimum monthly payment on a credit card might make more sense if you can’t afford to shell out a large sum of money at once. For example, a $1,000 purchase on a credit card that you don’t pay in full right away, or postpone, can mean you’ll be paying at least $20 a month, not including your interest rate and assuming this is the only purchase on your credit card. But a $1,000 purchase with a buy now, pay later loan will cost you $250 per installment. And if you miss any of these mandatory payments, you will be penalized.
Although some of the more popular BNPL “Pay in 4” services do not charge interest, there are still variable fees associated with delinquency. Zip (formerly Quadpay) users, for example, are charged late fees of $5, $7, or $10, depending on which state they live in. And in addition to being temporarily banned from using the service, if you miss an Afterpay payment, you will be charged a capped late fee starting at $10 and no more than 25% of the original purchase price.
Additionally, there are buy-it-now and longer-term pay-later services that charge interest, and these rates are often high. For example, Affirm may charge up to 30% APR depending on the store you make a purchase from and your credit score. This is significantly higher than the average APR charged for interest earning cards.
If you repay your loan within the allotted six weeks, you’re off the hook and won’t have to pay interest or fees. But since such short repayment periods can make it easier to default, consider whether you can afford to repay your purchase within the set repayment period before opting for a buy it now, pay later option. If you think you’ll need more time, you’d better make your purchase with a credit card instead.
To note: In February, one of the three major credit bureaus, Equifax, announced that it would be the first to include buy now, pay later refunds on its credit reports. According to Equifax research, including on-time BNPL payments could boost credit scores. But late payments, on the other hand, could have a negative effect.
Which option am I eligible for?
When you apply for a credit card, the issuer makes a Hard shot: It takes a survey of your credit history and ratings, which indicates how much of a borrower you are. However, when you apply for a BNPL loan, no thorough credit checks are performed to determine your eligibility to obtain one, and your score is not affected. This makes it easier for those with no credit or low credit to be approved for a loan.
To this end, if you cannot qualify for a credit card due to a poor credit rating and need to make a necessary purchase but cannot afford to pay it in full upfront, BNPL can offer you access to flexibility that a credit card might not. But in such cases, it is important to look for a repairer that does not charge any interest, such as Afterpay and Klarna, and to work out a repayment plan.
Note that because BNPL officers do not perform hard draws, this means applicants are not selected based on their ability to carry or repay a new loan. So even if you’re juggling multiple BNPL loans, you’ll usually still have access to opening additional loans. This makes it easier for users to take on more than they can handle and can lead to a cycle of debt.
It is important to consider your finances before deciding on a loan. And if you already have several loans, avoid taking on more debt by subscribing to a new BNPL plan.