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With Apple launching a new Buy Now Pay Later (BNPL) service we thought it would be a good time to revisit the concept. BNPL is a type of short-term loan that allows users to space repayments over a period of time when they make a purchase in a store or online.

When you make a purchase and you choose the buy now pay later option the total amount of the purchase will be paid back over equal instalments. The first instalment is usually paid when you check out with the rest being made on a payment schedule determined by the BNPL provider. 30-60 days after your purchase you will make your first repayment, much like a normal loan. There are many BNPL providers in the US including the Affirm service by Amazon and PayPal which has created a service called Buy in Four?


What Are The Key Points?

  • It’s a form of short-term loan that spreads repayments over a period of months
  • $200 is the average BNPL purchase price
  • In most cases, BNPL loans are interest-free
  • If you don’t pay on time, there are late fees
  • Major retailers like Amazon offer the service
  • If you don’t pay a BNPL loan, it can hurt your credit score


How Does BNPL Work?

Buy Now Pay Later essentially works like an installment loan – you can buy something today and pay it off in equal installments over just a couple of weeks or up to 12 months.

Let’s say that an essential item in your household breaks. Something that you need urgently on a day-by-day basis. You go online and you realize that this item is going to cost you $1,200 – more than you have in cash. You hadn’t put this amount of money in your budget and so it looks like an unexpected expense. This is a great opportunity to use Buy Now Pay Later.

When you come to check out for this item instead of paying the full $1,200 you would elect the BNPL option. If you decide to pay it back over four instalments you would select this option and when it comes to checkout you would only pay $300 at checkout instead of the full $1,200. The rest of the $900 would be paid back in three further equal instalments.

Once you have made the next three instalments, your BNPL loan is paid back. If you miss any of these payments, there might be interest payable.


Buy Now Pay Later is Often Used For:

  • Buying household goods such as white goods and furniture
  • Clothes and fashion items
  • Electronics
  • Sports equipment


Why Would I Need Buy Now Pay Later?

In its simplest form – Buy Now Pay Later makes large payments more digestible by spacing them out over a period of time. Instead of a large lump sum being withdrawn to pay for the item all at once, you can pay back in more manageable chunks over a period of time. You can also time the payments to fall after your paychecks so that you know you’ll have cash in the bank.

Some costs are unavoidable and unexpected- like the washing machine that we talk about above. This is not only urgent, but also essential. This is an item that you need to replace. If you haven’t put this down as a budgeting expense category. Then you might not have this money saved up.

Buy Now Pay Later is also becoming incredibly popular for online shopping. In 2021 there were $100 billion worth of retail purchasing that was made using BNPL. This is a huge increase over the $24 billion that was spent in 2020 with BNPL. COVID-19 caused a huge shift in consumer behaviour in the US and really brought it to the mainstream.


Buy Now Pay Later – Where Can I Use It?

Many retailers online and in-store use BNPL. Etsy, eBay, Apple, ASOS, Peloton and Delta all offer a spaced payments service.

If you are checking out on a website that offers BNPL then they will make it very clear that this is possible. If you are unsure before you’re making the purchase, then check their website and they will have the terms and conditions available for payment. You might also want to contact their customer service team will be able to help you out with these questions.


Is It Expensive Over A Longer Period Of Time?

Buy Now Pay Later can be absolutely free of additional costs. Many of the services offer interest-free loans. If you make all of the instalments on time. This means that it’ll be nothing more to pay than the cost of the item. If you borrow $500, you would pay $500 over a number of instalments.

Some providers do add interest of up to 30% to their loans. It’s typically a lower cost than a payday loan and sits somewhere between0% and 25%. Make sure you know how much this amount is before taking out the loan if you have any concerns about your abilities to repay it.

If you don’t pay back the full loan amount on time, then there may be a cost. Typical late fees sit at around $10 which is enough to stop you defaulting on your loan.


Will BNPL Affect My Credit Score?

It’s simple – if you pay back all of your loan instalments on time, then your credit score won’t go down.

If for any reason you fail to pay back any of the instalments or the total loan amount – your credit score could be impacted. Buy Now, Pay Later is a type of credit or loan and is therefore seen as that in your credit report. It gives a good indication of whether you are going to pay back other types of loans and this is why it impacts your credit score.


Don’t Let Missed Repayments Impact Your Credit History In The Long Run

Lenders will also be able to tell if you’re a frequent user of Buy Now Pay Later. If you’re getting ready to borrow money instantly for an emergency, for a house or other big expense, it might be worth cutting back on BNPL for a while. The bottom line is that you should use it when you need it, not just because you can.


Why Would I use BNPL Instead of a Credit Card?

Most buy now and pay later schemes are cheaper than a credit card because of their low or 0% interest rates. If you look at the average credit card, the ARR is around 16%, but most buy now pay later providers offer 0% APR.

Even though a BNPL loan seems less important, it’s still a loan and needs to be treated like that. You don’t want to miss repayments and you don’t want it to impact your credit score if you do.

Richard Allan

Richard Allan

Richard Allan is the founder of Capital Bean and a passionate writer about personal finance, budgeting and how to save money at home and work.

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