Those who shop a lot online and in-person may have noticed retailers are increasingly offering “Buy Now, Pay Later” options at checkout. These options typically require an initial payment and then installment payments to pay off the bill. While these short-term loans may be appealing in this era of subscription-based services, there are things to know before you agree to this service, which is simply known as BNPL.
How BNPL Works
The concept of a credit card has been around since 1950, when the first universal credit card was introduced by Diner’s Club. Today, smaller buy now pay later sites such as Afterpay, Affirm, Klarna and Splitit have taken the idea of a credit card and used it to carve out a growing niche by providing consumers smaller lines of credit for their retail purchases.
Buy Now Pay Later no credit check programs work by requiring the buyer to make an initial payment, usually 25 percent of the purchase price, and then pay the rest of the purchase balance through a series of predetermined installment payments. These programs have grown in popularity so that now bigger companies such as PayPal, Chase, Citi and even American Express have introduced similar programs. Retailers welcome the BNPL option because it increases their sales.
How It Impacts You
With the growing interest in BNPL options, some consumers may not think twice about taking advantage of it. Before you sign up for a BNPL short-term loan, we recommend doing your homework. BNPLs do carry some risk, especially for those who don’t fully understand their agreement. A recent survey found a surprising 31 percent of users of a BNPL service missed or made a late payment. Here are some things you should know:
- Read the fine print: Before you sign up for a BNPL service, read the fine print. Understand the total cost that you will be paying for your purchase, the required amount of installment payments, as well as how much of a late fee you will incur if you miss a payment.
- Review returns and refunds policies: Learn about the service’s refund and return policies in case your item is not delivered, gets stolen during delivery or if you need to return it. Unlike traditional credit cards, BNPL programs don’t offer the same type of consumer protection that exists with credit cards. Instead, you’ll likely have to work directly with the merchant to resolve the issue, which may make it more difficult to get your money back.
- Spend responsibly: Don’t use BNPL services for purchases you can’t afford. To avoid incurring late payment fees, set up a monthly auto-pay to the BNPL service. While BNPL programs may offer low-to zero interest rates, any late payments will incur a fee, hurt your credit score and, in some cases, the remaining balance may be sent to debt collectors.
- Know the impact on your credit report: Most BNPL short-term loans require only a soft pull on your credit report, which means the query isn’t reported to the three main credit bureaus. There are others, however, that do conduct hard pulls of your credit report to approve the loan. Know what impact your BNPL service will have on your credit score.
- Choose credit cards instead: BNPL loans do not provide the same rewards as traditional credit cards, such as Travis Credit Union’s Platinum Visa® credit card. BNPL users miss out on the cash back rewards and consumer protection that come with credit cards. Also, BNPL programs do not contribute to building you up to the highest credit score, which credit cards do.
Your financial wellness is important to us. If you need more information about credit cards such as our Platinum Visa, your credit report or personal finances, we can help. Before considering a BNPL service, check out our Loan Rates and see what lending options are best for you.
When it comes to credit, TCU has free information for understanding your credit score. Also, our Experian Boost™ can help raise your credit score immediately. The higher your credit score, the better rates you’ll receive on loans. If you need help managing your budget, you may find it helpful to create your personal spending plan.
Learn more about how Travis can help improve your financial wellness at traviscu.org.