With Buy Now, Pay Later (BNPL), consumers can make a purchase now and pay for it in the future, often interest-free. Online shopping has made BNPL, sometimes referred to as “point-of-sale installment loans, an increasingly popular payment option. But, while consumers can benefit from BNPL financing, some disadvantages exist and should be considered.
How Do BNPL Loans Benefit You?
BNPL lenders promote their credit products as easy to use, with smooth interfaces, and cheaper credit options. Also, they usually offer financing to consumers with poor or limited credit histories who may not qualify for credit cards or personal loans.
Installment payments with BNPL lenders are generally interest-free, which consumers find very appealing. But, it’s essential to remember that there can be hidden interest fees built into the repayment structure.
No Late Fee Charges
Most BNPL lenders do not charge late fees but some do, so before finalizing a loan, make sure you understand the terms. That said, BNPL late fee terms are usually more forgiving than those of other lenders, which also makes BNPL a more attractive prospect for clients.
Simple Repayment Process
Most BNPL loans are designed to be repaid in four installments over a few weeks, at which point the loan disappears. Unlike a traditional credit card, there is no revolving credit line. And, because many BNPL lenders offer autopay, consumers are less likely to forget to make a payment.
Fast Loan Approval
BNPL loans can be approved in seconds for online shoppers. This is highly appealing compared to the time-consuming application and approval process for other loan options like personal loans and credit cards.
How Risky are BNPL Loans?
All of the above benefits may be outweighed by the disadvantages. There is no built-in protection for BNPL loans, which can encourage overspending and overborrowing. Before using a BNPL loan, consumers should be aware of these risks:
Due to the ease of BNPL loans, consumers may take out too many at once and accumulate more debt than they can repay. As a result, consumers can become stressed financially if they’re regularly taking out BNPL loans for extended periods.
Reduced Credit Score
BNPL data is beginning to be incorporated into credit reports by credit bureaus. For some, that could be a good thing, but for others, a late BNPL payment will hurt your score and make borrowing in the future more difficult.
It is possible to end up paying interest on an “interest-free” transaction if you finance BNPL loans with a credit card.