Buy Now, Pay Later (BNPL): What It Is, How It Works, Pros and Cons

Part of the Series Future First: Money Lessons for Teens Financial Literacy: What It Is, and Why It Is So Important to Teach Teens Where to Start

1. Financial Goals for Students: How and Why to Set Them
2. How to Teach Others About Finances
3. How to Learn About Finance
4. Principles of Building Wealth
5. Finance Terms for Beginners

Teaching Investing Basics

1. Stock Market for Teens
2. Investing for Teens: What They Should Know
3. Saving vs. Investing: What Teens Should Know
4. Talking to Teens About Financial Risk
5. Portfolio Management for Young Adults
6. What Are Asset Classes? More Than Just Stocks and Bonds
7. What Is Stock Trading?
8. Use the Investopedia Simulator

Teaching About Credit & Debit

1. Credit Tips for Teens
2. Credit Cards vs. Debit Cards
3. Banking 101
4. What is Debt?

Teaching About Digital Money

1. What Is Fintech?
2. What Is a Mobile Wallet?
3. What Teens Need to Know About Cryptocurrency
4. What Is Buy Now Pay Later? CURRENT ARTICLE

Applying it to the Future

1. 10 College Degrees With the Best Starting Salaries
2. What Are the Five Purposes of Budgeting?
3. How to Read a Pay Stub
4. Teens and Income Taxes
5. Renting an Apartment for the First Time: What You Need to Know
6. Personal Finance Influencers to Know

What Is Buy Now, Pay Later (BNPL)?

Buy Now, Pay Later (BNPL) is a type of short-term loan that lets shoppers pay for products in small installments spread over a set period of time. These services are typically used for minor, although expensive purchases like smartphones or luxury clothing.

Unlike other types of loans, BNPL loans are typically interest-free and rarely carry other service fees, making them suitable for people on a tight budget. However, this kind of convenience can come at a cost, as you may be tempted to buy more than they can actually afford.

Learn more about BNPL, how it works, and pros and cons to keep in mind. 

Key Takeaways

• Buy Now, Pay Later (BNPL) offers short-term loans that split expensive purchases into smaller, interest-free payments.
• BNPL loans can be more affordable than other forms of financing, but they are less secure. 
• Advantages of BNPL loans also include convenience.
• If you are late or default on payments, you may get a lower credit score.

How Buy Now, Pay Later Works

While terms may vary based on the provider, most BNPL programs offer short-term loans with fixed payments spread over a few weeks or months. When the retailer offers BNPL, you can choose this option during the checkout, or you may use BNPL services through your credit card, if your credit card offers them. 

BNPL loans work like installment loans like personal loans, mortgages, or car loans. The seller receives the entire purchase amount from the loan provider upfront then you pay off the amount to the BNPL service in smaller installments. 

A small down payment, generally around 25% of the purchase amount, may be required at once and then you pay off the rest in the coming weeks. For example, if the purchase costs $1,000, you may have to pay $250 immediately during the checkout, then you can pay the remaining $750 in five $150 installments spread over five or 10 weeks.

In most cases, the payment is deducted automatically from the registered credit card or bank account, but some providers may offer an option to pay via check or bank transfer.

According to the Consumer Financial Protection Bureau (CFPB), most BNPL providers only offer autopay options. This is typically done to minimize the risk of defaults. 

BNPL services generally don’t charge interest, making them more affordable than other types of financing. Some providers like ZipPay may charge small service or convenience fees, but these are typically much lower than what you would pay as interest charges on other types of loans. 

Tip

Not all purchases are eligible for BNPL and you will likely face a limit on the loan amount. 

How Buy Now, Pay Later Affects Your Credit

BNPL payments are not reported to credit bureaus, so they can’t lower or boost your credit score. BNPL providers may conduct a soft credit check before approving the loan, although this typically doesn’t affect your credit score. In rare cases, some providers like Klarna may conduct a hard check, which can slightly lower your credit score.

If you can’t pay the installments on time, the late or missed payments may be reported to credit bureaus and a collections agency could potentially get involved. This reflects poorly on your credit history. 

Note

According to the CFPB, people who frequently use BNPL services tend to have lower credit scores and annual incomes above $20,000 and below $50,000.

Risks of BNPL Apps

While BNPL services offer a convenient option to make expensive purchases seem more affordable, there are several downsides to consider before signing up. 

Overspending

The interest-free installments and smaller payment amounts can make larger purchases seem more affordable than they really are. This can lead to a temptation to buy more stuff than needed, increasing the risk of debt, defaulted payments, and lower credit scores.

Limited Regulations

BNPL services are generally not as regulated as credit cards and other forms of financing in the U.S., which means consumers don’t get strong protection and dispute resolution options. 

Issues with Returns and Refunds

As BNPL services spread the payment amount over time, it can be difficult to cancel the payment or issue a refund in case of returns. 

Risks of Late Payments

Some BNPL providers charge additional fees in case of late payments. Any defaults are also reported to the credit bureaus, which lowers the credit score, making it difficult to access other forms of financing. 

Pros and Cons of BNPL

To make the best decision for your financial goals, consider the advantages and disadvantages of using BNPL services. 

Pros	Cons
Smaller, interest-free installments	Late payments come with penalties and lower credit score
Doesn’t require a high credit score for approval	Returns and refunds may be complicated
Easier and faster approval process	Fewer regulations than other financing options

Teaching Teens About BNPL

Teens who have just started receiving allowances or working their first job may be tempted to use BNPL to afford bigger purchases. They may not fully understand the risks and consequences of these services, so it’s important to sit down and explain how BNPL works and whether they should be using it. 

Most BNPL providers require the buyer to be at least 18 years old and have some credit history, which makes most teens unqualified to access these services. If they are eligible, it can be helpful for teens to use BNPL under parental guidance. It can teach them about loans, installments, and the importance of paying bills on time. 

There’s a way to make the process safer by avoiding BNPL services entirely and recreating the experience within the family. The parent can make the purchase while the teen pays the parent in small, interest-free installments. This can help simulate the BNPL process without the major consequences. 

Once they’re older and ready to manage their money, parents can gradually introduce BNPL services, share advice on building good credit, and warn them about the risk of debt and default. 

The Bottom Line

BNPL can make major purchases seem more affordable, but it’s important to consider two key things. First, is the purchase really necessary, or is it tempting just because it seems cheaper? Second, borrowers must fully understand the risks and consequences of late payments and how they might impact future borrowing options. It can be helpful to compare BNPL with other financing options before making the final decision.