Understanding Buy Now, Pay Later (BNPL)

Alex_Clark

Most people couldn’t afford the Model T when Henry Ford launched them in 1908. Several years later, Ford solved this problem by lending people the money to buy a Model T. At the time, this was revolutionary. This type of installment loan payment was one of the earliest renditions of the “Buy Now, Pay Later” model.  

The concept of “credit” has been around for centuries. Records of ancient societies utilizing loans to buy staples like grain date back thousands of years. But, it has only recently become pivotal to our everyday purchases. With the mass adoption of the internet for commerce, smartphones using smart payment methods, and the impressive volume of consumerism witnessed today, the “Buy Now, Pay Later” model is growing fast. 

What is Buy Now, Pay Later? 

Everyone knows the basics of how a credit card works but the popularization of Buy Now, Pay Later (BNPL) is a novel one. Though many use it, some consumers are hesitant due to a lack of knowledge of how this model works. Buy Now, Pay Later apps offer you exactly what the name indicates.  

It’s a kind of payment plan that allows you to buy things now and pay them off at a later date. Usually, these short-term payment plans allow you to pay off your purchase within a few months. The Buy Now, Pay Later model, as it’s known, is different from automobile financing or housing mortgages. Why? Because Buy Now, Pay Later is usually used for much smaller purchases like buying a computer or flight.

The uses for Buy Now, Pay Later are numerous and many e-commerce companies are rapidly adopting this feature in their online stores. While it shares the same fundamentals of a credit card purchase, the details are different. Getting a better understanding of how Buy Now, Pay Later works will help clarify a confusing but otherwise helpful purchasing strategy. 

How does Buy Now, Pay Later work?

Because it’s an installment loan of sorts, you pay in multiple installments. The first payment is usually due upon sale. A credit card purchase, on the other hand, has no set payment plan besides paying the monthly minimum balance dictated by your credit card agreement. With Buy Now, Pay Later, the end date is clear. 

There are many options for Buy Now, Pay Later and many of the apps and websites have different terms and conditions. But they are largely the same from the top down. What do they all have in common as far as how they work? Let’s look at an example of how many of the Buy Now, Pay Later options operate. 

1. You shop on your favorite e-commerce site and fill your cart up with what you want. At checkout, you’re given the option to pay with your standard payment methods. But there’s also an option to Buy Now, Pay Later. You choose to Buy Now, Pay Later. In essence, you’ve opted to simply break up the full balance into several payments. 
2. You’ll still need to enter your payment method but this makes things easier for you as future payments will be automatic. For this example, you’re given a four-installment payment plan. 
3. Before you can qualify for Buy Now, Pay Later, you’ll need to fill out an application most of the time. This application will ask for basic information like name and date of birth. But it will often ask for social security numbers to initiate a check on your creditworthiness. 
4. This credit check is used to evaluate your past credit history by looking at your credit score and will give you an approval or denial rating within seconds. Sometimes, however, you’ll still be approved even if you have low or no credit. 
5. After approval, you’ll be given the exact details of your financing plan including how many installments, the payment dates, and what kind of consequences you'll face if you miss a payment. It may also include the interest rate, but many Buy Now, Pay Later companies don’t charge interest on the purchase. 
6. To conclude your Buy Now, Pay Later experience, you’ll pay your first installment upon checkout and then you’re good to go. 

How is Buy Now, Pay Later different from a credit card? 

To understand how it’s different from a credit card purchase, let’s look at the inner workings of both. Credit cards work by giving you a specific amount of credit available to use wherever you can. Credit card companies charge an interest rate and usually have a minimum balance due every month. Whatever balance you rack up on your credit card needs to be paid back just like every Buy Now, Pay Later option but the timeline is more flexible.

Buy Now, Pay Later, on the other hand, doesn’t usually charge interest. The barriers to the initial ownership of a credit card are often more challenging than simply selecting a Buy Now, Pay Later option at checkout. One advantage of a credit card is that it helps build credit whereas Buy Now, Pay Later doesn’t. But this is a double-edged sword as you can negatively affect your credit score with irresponsible credit card behavior.

Additionally, credit cards often come with rewards to entice consumers to use their credit cards for purchases. Things like mileage points and cash back rewards are common with credit cards. Lastly, credit cards come with consumer protection to help protect you from fraud. Buy Now, Pay Later doesn’t come with this protection and consumers may find themselves vulnerable to the dangers of fraud.

What are my Buy Now, Pay Later options? 

Here’s a list of the most useful Buy Now, Pay Later apps and websites. 

• Afterpay: One of the largest Buy Now, Pay Later companies, allows you to pay online and offline in four installments over six weeks with zero interest. 
• Affirm: Another leading Buy Now, Pay Later company, offers flexible payment plans with a long list of partnered businesses (and interest rates vary on the retail partner). 
• PayPal: The online payment pioneer, offers “Pay in 4,” so you can pay off purchases with more than a million merchants in four equal installments over six weeks without interest. 
• Klarna: This Swedish-created app allows shoppers to pay back their loans interest-free over 30 days or in four installments. 
• Uplift: A Buy Now, Pay Later option with travel at the forefront of its offerings, gives consumers a penalty-free option for flights, hotels, and more. 
• Splitit: A valuable option for consumers with low or no established credit, requires no credit check, no interest, and no fees to use, though it centers around the available credit you have on your existing credit cards. 
• Zip: Another BNPL app that allows you to split your purchases into four equal installments, due every two weeks. You can use Zip to shop at millions of online and in-store retailers, including Amazon, Target, Walmart, and Best Buy.

Buy Now, Pay Later apps are an attractive option for online shoppers and the risks and rewards need to be evaluated to determine if it’s smarter to pay upfront, in installments, or on credit.

*The opinions reflected in this article are the sole opinions of the author and do not reflect any official positions or claims by Acer Inc.

Disclaimer: The material in this article is presented solely for informational and entertainment purposes and is not to be construed as financial advice. Acer recommends consumers make the decision themselves after careful research and analysis of what they can and cannot afford.