Buy Now, Pay Later

Buy now, pay later (BNPL), also known as point-of-sale installments, is a way to purchase an item without paying its full price upfront. It's short-term financing wherein individuals must complete payments in several weeks or months.

In most instances, you will need to pay a small amount as an initial payment — usually around a quarter of the total price — and pay the remainder in installments with a set schedule.

BNPL has been gaining popularity recently as online purchases have increased since the pandemic. As of November 2021, around 46% of BNPL users used it three or more times within the last year. BNPL isn’t limited to online purchases. It's also available in-store and via several credit card issuers.

Understanding how BNPL works can help you manage your finances better. With its many benefits, there are also some risks to consider.

BNPL can work for consumers who can't afford to shell out for high-priced items upon purchase. The flexibility gives you time to come up with the rest of the payments.

However, there are things you must consider. Most BNPL lenders don't charge interest, although that’s not a guarantee. Some lenders do.

You must also be mindful of when your installments are due. Paying late means you will be subject to a late fee and hurting your credit score.

Generally, if you “buy now, pay later,” your credit score won’t be affected. But your lender plays a significant role in how your credit score is involved or not.

Although BNPL lenders do a credit check as part of their application process, most only conduct soft inquiries. However, some lenders do a hard pull when doing a credit check. In this case, your credit score may decrease but only by less than five points, and fortunately, the dip is temporary.

Some BNPL providers report your activity to credit bureaus. It then affects the amounts owed, which credit bureaus factor in when calculating your credit score. Of course, if you miss payments, it could also pull your credit score down.

BNPL can be an attractive option to consumers because of its accessibility and flexibility. Items that typically would only be available to high-earners are made accessible to people of all backgrounds with BNPL.

Unfortunately, Financial Health Network's study found that consumers who use BNPL are four times more likely to come from financially vulnerable households. They typically have more challenges saving, borrowing and planning their finances.

Using the BNPL payment method can make maintaining a budget challenging and quickly put you in a bind if you aren't mindful of your expenses. So, it’s best to use it only for essential purchases.

Now that you know what “buy now, pay later” means and how it works, let’s look at calculating payments. Knowing how much you need to prepare for each installment is essential to smart budgeting.

Fortunately, determining how much your BNPL payments are isn't complicated. You usually don't have to pay interest when you use this service, so you can calculate the amount by dividing your item's price by the number of payments you must make.

There's nothing like applying a formula to a real-life situation to make a concept stick. So let's see how calculating BNPL payments would work in the example below.

Everyone knows Apple recently released its newest gadget: the iPhone 14 Pro Max. With its upgraded camera features and extended battery life, most would agree it's worth the investment. But not everyone can pay for a new phone outright.

So let's see how significant the change in cost would be if you purchased the item traditionally (paying the entire amount immediately) versus using BNPL.

The base model of the iPhone 14 Pro Max costs a whopping $1,099, which may not be feasible for everyone. Upon checkout, you’ll notice a BNPL option, allowing you to pay in 24 monthly installments.

Let’s divide $1,099 (the item price) by 24 (the number of periodic payments).

Paying $1,099 over 24 months gives you monthly payments of $45.79. That’s a huge difference. Imagine walking out of the Apple store with your brand-new iPhone 14 Pro Max, having spent less than $50.

Due to its recent popularity, it's not surprising that more institutions are now offering BNPL as an option. However, there was a time when BNPL lenders were only banks and credit card issuers.

Today, more consumers are going for BNPL because of its accessibility. Unlike traditional bank loans or credit card applications, you don't need a stellar credit score to secure approval. Someone with poor credit standing or no credit history can still use BNPL.

Now, BNPL lenders aren't limited to traditional financial institutions. Fintech companies have entered the race, such as the likes of Affirm, Klarna and Afterpay. Even PayPal now offers BNPL with PayPal Pay in 4.

Each of these fintech companies has something different to offer. For example, Afterpay, Klarna and PayPal Pay in 4 automatically divide your remaining balance into four equal payments. In comparison, Afterpay offers installment options ranging from six to 12 months.

The rise of fintech companies in the BNPL arena fulfills the needs of a potentially significant portion of the market — those who may find securing services or products from traditional financial institutions challenging.

Using BNPL through your credit card can seem like an attractive financing option to many consumers. However, like all things, it has its drawbacks.

MoneyGeek details BNPL's pros and cons to give you a thorough evaluation.

The concept of “buy now, pay later” is something that you might have encountered when shopping online or shopping for Apple products. If you’re wondering how BNPL works, you may find the below responses to commonly asked questions helpful.

You may have the option to “buy now, pay later” when making in-store or online purchases using your credit card. When it comes to financing methods, there are more than enough online resources to provide whatever information you need.

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