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Buy now, pay later (BNPL) loans are also known as point-of-sale (POS) loans. This type of loan is a popular and convenient way to make larger purchases at retail stores, and like credit cards, the products allow customers to make a purchase and pay it off over time – usually in a set number of installments. Deciding which is better than the other depends entirely on the buyer’s financial situation and goals.
What is buy now, pay later?
Buy now, pay later (BNPL) programs are a type of short-term financing offered and accepted by many retailers in the US (both in-store and online). BNPL services provide customers with a loan that needs to be repaid in a few weeks or months.
Some online retailers offer BNPL options during checkout where customers can get instant approval. However, many consumers can download popular BNPL apps and sign up to use them at qualifying retailers. Afterpay, Affirm, and Paypal are some popular options. Each has different terms that set interest rates, payment schedules, and merchant networks.
How Buy Now, Pay Later programs work
BNPL programs usually require an upfront payment as the first installment, e.g. B. 25% of the total purchase amount. The next installments are fixed amounts that can earn interest or a set monthly fee.
Customers can shop through the BNPL app or from qualified retailers’ websites. During the checkout process, customers can select a payment plan to determine the amount due weekly or monthly. If the credit for the purchase is not repaid in full by the end of the installment term, the customer may incur interest on arrears, which has a negative effect on the credit history, similar to paying with a credit card.
What is the difference between BNPL and credit cards?
BNPL apps and credit cards have one thing in common: both allow customers to pay off a purchase over a period of time in periodic installments. However, there are significant differences between two payment options. A key difference is that BNPL apps are only accepted by certain retailers and lenders, while credit cards are far more widely accepted.
Credit cards give cardholders a minimum monthly payment that may or may not be set. Cardholders can choose a timeframe for paying off purchases, but will be charged monthly interest if the full balance is not paid by the end of a billing cycle.
Many BNPL apps award fixed-rate loans for each purchase. Some may not charge interest or late fees, but every service is different.
Of course, everything has advantages and disadvantages:
Credit Card Pros
- Monthly minimum payments can be paid off over a longer period of time, although we never recommend keeping a balance
- Can be used for almost any type of shopping including retailers, gas stations, groceries, bills and more
- Potential to earn rewards such as points, miles or cashback
- Opportunity to benefit from other perks such as welcome bonuses or rental car collision damage insurance
- Opportunity to improve credit through responsible spending
Disadvantages of the credit card
- The application process may take longer
- Interest accrues if purchases are not paid in full by the end of each monthly billing cycle. We never recommend carrying a balance if it can be avoided
- Applying for a credit card usually involves a tough credit check (which can negatively impact your credit score).
- Fees may include annual fees, foreign transaction fees and late payment fees
- Fixed monthly installments (partially without interest)
- Choose your own payment frequency
- Can get instant approval and apply it to purchases immediately
- Hard credit checks are not always required
- No reward potential
- Only accepted by some retailers
- Interest may be charged on purchases or late fees for late payments
- It’s harder to build credit with responsible spending
Which is better: BNPL or credit cards?
The decision as to whether BNPL programs or credit cards are a better choice for financing purchases depends on the customer’s financial situation and long-term goals. BNPLs are typically only accepted by online or physical stores, while credit cards can be used for almost any type of purchase.
When shopping for a BNPL product, pay attention to the retail network, payment plan options, existing late fees or interest charges, refund policies, and whether the lender conducts a tough credit check. Some BNPLs might be a good option for those with low credit scores or short credit histories, as the criteria to be approved are often less stringent than most credit cards.
If your goal is to increase your credit score or build a credit history, credit cards are a much better option. Most BNPLs do not report spending activity to credit bureaus. On the other hand, the major credit cards report spending and payment activity to the big three credit bureaus. Responsible spending habits like on-time payments and a low credit utilization rate increase a cardholder’s creditworthiness. Since borrowing through BNPL is similar to taking out a loan, too many loans being opened and then closed could affect creditworthiness.
Some card issuers offer versions of BNPL that allow cardholders to take advantage of BNPL without requiring a new enrollment. For example, Chase’s My Chase Plan® offers cardholders the ability to pay back a purchase of $100 or more in equal monthly installments for a fixed monthly fee. Current cardholders should check with a card issuer to read the fine print before signing up for any BNPL service.
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“Buy now, pay later” services are useful for people with bad credit, no credit, or just wanting convenient payments: customers can get approval in seconds and make an instant purchase. However, purchasing power is limited as customers can only use BNPL at qualified brick-and-mortar or online retailers.
Credit cards can be used for a wider range of purchases beyond retail. Credit cards (when used responsibly) can help build a cardholder’s credit history, which is useful when applying for other types of credit, such as mortgage or auto loans. Many landlords even check creditworthiness when assessing whether or not a prospective tenant is a good tenant. Check with a card issuer first to see if they offer a BNPL program before signing up for a new service, but always read the fine print.