Understand How Buy Now Pay Later Model Works & Benefits

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What Is Buy Now, Pay Later?

Buy Now, Pay Later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. Also referred to as "point of sale installment loans," BNPL arrangements are becoming an increasingly popular payment option, especially when shopping online.

Key Takeaways

• Buy now, pay later arrangements are point-of-sale installment loans that allow consumers to make purchases and pay for them at a future date.

• Consumers typically make an upfront payment toward the purchase, then pay the remainder off in a predetermined number of installments.

• Buy now, pay later plans often don't charge interest and are often easier to get approved for than traditional credit cards or lines of credit are.

• Normally, BNPL doesn't affect your credit score; however, late payments or failing to pay can damage your credit score.

Like its name suggests, "buy now, pay later" lets you make a purchase and receive it immediately but pay for it at a later time, usually over a series of installments.

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Though this type of payment plan has been available for years, it exploded in popularity during the pandemic as more people shifted to online shopping.

You can use a buy now, pay later plan at most major retailers, but whether you should depend on the plan and your financial situation.

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Understand How Buy Now Pay Later Model Works & Benefits

Understand How Buy Now Pay Later Model Works & Benefits

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Buy now, pay later programs aren't all the same. Each company has its terms and conditions, but generally, point-of-sale installment loans operate along the following lines:

• You make a purchase at a participating retailer and opt for buy now, pay later at checkout.

• If approved (you're told in seconds), you make a small down payment, such as 25% of the overall purchase amount.

• You then pay off the remaining amount due in a series of interest-free installments.

• You can pay via a check or bank transfer; payments can also be deducted from your debit card, bank account, or credit card automatically.

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Although they both involve delayed payments, BNPL is different from purchasing with a credit card. When you use a credit card to pay for things, you're only required to make the minimum payment due on the card each month.

Interest accrues on the remaining amount (unless you've used a card with a 0% introductory APR) until you pay it off in full. But you can carry a balance indefinitely.

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In contrast, BNPL arrangements often don't charge interest or fees. But they have a fixed repayment schedule—generally several weeks or months. You're told upfront what you'll need to pay each time, and it's usually the same amount. It's comparable to any other sort of unsecured personal or consumer loan.

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Not all purchases may be eligible for buy now, pay later financing. And there may be limits on the amount you can finance this way. But buy now, pay later can be an attractive way to pay for smaller purchases when shopping online, and its popularity grew during 2020, with the rise of e-commerce in general.

During checkout, you’ll see an option to break up your total purchase and pay a smaller amount now, instead of the full balance.

It may ask for information like your name, email address, date of birth, phone number, and Social Security number. You'll also provide a payment method. Then, the BNPL provider may perform a soft credit check, which won't affect your credit score and approve or deny your application in a matter of seconds. Approval criteria vary, but even if you have bad credit or no credit, you may still be eligible.

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The plan you’re offered will also vary by provider, but many companies use a “pay-in-four” model, which divides your purchase into four equal installments, each due two weeks apart, with the first payment due immediately.

While a pay-in-four plan doesn’t usually charge interest, longer-term BNPL plans may charge an annual percentage rate of up to 30%. Fees, like for late or rescheduled payments, range from $1 to $10 and are sometimes capped at 25% of the purchase value, depending on the company.

Credit Checks

Most buy now, pay later companies only require a soft credit check for approval, which doesn't affect your credit score. However, others may conduct a hard pull of your credit, which could knock a few points off your score temporarily.

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Some buy now, pay later loans are reported to one or more of the three major credit bureaus. If a financial institution sends this information, the loan can show up on your credit reports, and it could impact your credit score.

Special Considerations

There are some things to be aware of before entering into a BNPL arrangement. First, it's important to understand the repayment terms to which you're agreeing. Again, these can be different for every buy now, pay later company.

For example, some companies may require you to pay the remaining balance with biweekly payments over a month-long period. Others may give you three months, six months, or even longer to pay off purchases. And your interest rate, if there is one, might vary depending on the loan terms.

It's also necessary to know how your payments will work so that you can plan for them in your budget. This ensures that you cannot only afford your payments but also make them on time. Missing a payment for a buy now, pay later agreement could result in late fees. Your late payment history could also be reported to the credit bureaus, which could hurt your credit score.

Also, keep in mind that though you may be approved for a 0% interest point-of-sale installment loan, that's not guaranteed. Buy now, pay later platforms can charge interest on purchases that can easily match or outpace what you might pay with a credit card. And unlike a credit card, you're not earning any rewards on purchases you make using buy now, pay later arrangements.

Finally, consider return policies and how buying now, and paying later might affect your ability to return something you've purchased. The merchant may allow you to return the item but you wouldn't be able to cancel the buy now, pay later arrangement until you can provide proof that the return has been accepted and processed.

Pros and Cons of Buy Now, Pay Later

Buy now, pay later financing agreements allow consumers to pay for things over time without interest charges. And it's possible to get approved for this type of financing even if you've been shut out of other loan options due to a low credit score.

BNPL loans don't add to your credit card debt, but they add to your loan debt. They don't usually affect your credit score, namely because they're often too brief to be reported to the credit bureaus at all.

On the downside, getting them and paying them off doesn't help you establish and build good credit, either (as more conventional financing methods do). You also miss out on any perks that credit cards offer, such as cash-back or rewards points,And if you want to return an item you bought via BNPL, it can get complicated.

You should get your money back, of course—but there can be a delay until the merchant informs the BNPL lender of the refund. You may have to keep on making payments in the meantime. If you don't, the payment might be marked tardy or missing, and then you could incur fees, and late payments will eventually ding your credit score.

Pros

• A convenient, disciplined way to pay for purchases over time

• Frequently zero-interest or lower-interest than credit cards

• A good credit/high credit score is not necessary to qualify

• Fast approval

Cons

• Payments can be hard to track

• Missing or late payments result in late fees, damage to credit score

• No rewards or cash back earned on purchases

• Payments may continue even if the item is returned

Buy Now, Pay Later vs. Credit Cards

In India, there are mainly three differences between BNPL companies and banks that offer credit cards.

1) Eligibility Criterion- Banks have more stringent criteria to give out credit cards (such as their CIBIL credit score, whether they are earning above a certain criterion or not). BNPL companies are relatively less stringent in their criteria. This helps many consumer segments, such as self-employed people and lower-income category sections.

2) Accessibility- Unlike credit cards, where you have to fill out various online forms going through multiple levels of authentication, we can get access to the BNPL option through a one-stop authentication using our UPI ID. Another fact to be noticed is there is no waiting time to avail of the BNPL option unlike say credit cards, where we have to wait 2-3 weeks after applying for one.

3) Interest Rates- BNPL companies tend to offer an interest rate of around 28-30% and as mentioned earlier, interest rates are only applied when the customer opts for a longer duration of repayment. Whereas for credit cards, this tends to be way higher than 36-42% annually. Cases of high-risk borrowers do exist in which BNPL companies offer their services at interest rates similar to credit cards.

Like buy now, pay later loans, credit cards can be used at retailers. But they can also be used to buy gasoline, make utility bill payments, and accommodate other kinds of expenses. If the cardholder pays their balance in full each month, they won't owe any interest. Otherwise, their balance will accrue interest at the card's annual percentage rate (APR).

Credit cards may also charge fees, including:

• An annual fee

• Balance transfer fees

• Cash advance fees

• Foreign transaction fees

• Late payment fees

A credit card is an example of revolving credit. With this type of credit agreement, you have a set credit limit against which you can borrow. As you make purchases with a credit card, your available credit is reduced by that amount. When you make a payment, that frees up your available credit.

Buy Now, Pay Later vs. Credit Cards: Which Is Better?

Buy now, pay later plans and credit cards are both options to consider when making purchases online or in stores. But each has some advantages and disadvantages.

Pros of Buy Now, Pay Later

• Convenience: You can apply online and be approved almost instantly

• Get approved without a hard credit check, which can lower your credit score

• Pay off purchases in installments, typically with no interest charges

• Choose a payment frequency that fits your budget (at some BNPL providers)

Cons of Buy Now, Pay Later

• Because you don't have to pay in full right away, it's easy to overspend

• Payment plans aren't always interest-free

• Missing a payment or being late with one could hurt your credit score

• Not all retailers accept buy now, pay later

Credit Card Pros

• Can be used at a wider array of retailers and for other purposes

• Pay off purchases over time at your own pace, without fixed installment payments

• Potential to earn cash back, miles, or points on purchases

• Cards may offer other perks, such as travel and rental car insurance

Credit Cards Cons

• Interest charges can add up quickly if you carry a balance from month to month

• A hard credit check is typically required to qualify

• Late payments can be damaging to your credit score

• Credit cards can charge numerous fees, which add to your overall cost

How to Choose a Buy Now, Pay Later Plan

When comparing buy now, pay later plans, pay particular attention to the following:

• Which retailers accept it

• Initial deposit requirements

• Number of installment payments required

• Interest charges, if any

• Fees, if any

• Limitations or exclusions on purchases

• Credit check requirements

• Shipping policies

• Refund and return policies

How do BNPL Companies earn revenue?

BNPL companies make money mainly from two avenues:

Revenue from Sellers

For vendors, BNPL is an alternative payment method (others include credit & debit cards/wallets/Cash-On-Delivery) and thus, they have to incur a transaction fee like any other medium at a particular rate. However, a rate of 2-8% is higher than a normal credit-card discount rate, which is usually around 2.9% for e-commerce transactions and about 1 percent less for transactions made by credit cards in-store.

Thus, BNPL companies have to position their service offering in such a way that it convinces future customers of how enticing their service is, and this would further convince more vendors to buy into the BNPL service they are offering thus increasing the customer traffic.

Revenue from Customers

Most third-party BNPL providers do have their soft-credit checks to avoid giving money to people who have a poor record for repaying obligations, but this is not universal. Here is how BNPL provides monetizing from consumers:

1)Interest- This varies depending on the company. Some providers like Lazypay charge an interest of 10-30% on the “loan” amount, depending on the customer’s credit and duration of repayment. There are other organizations like Split in America which do not charge any interest rate as long as the installments are paid in due time.

2) Late fees- This forms a major chunk of the revenues of the BNPL organization (as high as 30%). Late fees occur when a charge is imposed on a customer for not paying the due amount on time and he thus has to pay later. Think of it like borrowing a book from a library, and then the various fines accumulated for not returning the book.

Note:- Every provider has different policy and check thoroughly before using