What is BNPL and how does it differ from other financing?
Buy Now, Pay Later (BNPL) is a relatively new player in the world of financing, enabling consumers to postpone payment for purchases and pay off the full amount in monthly installments, usually on an interest-free basis. There are many different reasons why one might choose to use BNPL rather than traditional credit cards or loans; however, we also explore the limitations of BNPL services.
What is BNPL?
Buy Now, Pay Later (BNPL) is a form of financing which allows consumers to fund their purchases in the present but pay for them at a future date. One of the key selling points of BNPL is that it invariably works on an interest-free basis. They have become increasingly popular in the last few years, especially for the younger generation and more than often for online purchases.
The BNPL phenomenon is also referred to as a Point-of-sale installment loan. This is because they allow consumers to make purchases (either physically or online) and then pay them off in a set number of installments, which are often interest-free.
Consumers are increasingly using BNPL for their purchases with as many as 60% of consumers having already used these services in the past. According to data from C+R, by April 2021, 46% of consumers were already making at least one payment via a BNPL agreement.
Why has BNPL increased in popularity?
Although BNPL services have existed for over 15 years, according to Bankbazaar, they have only really become popular in recent years. This is largely due to consumer dependence on online shopping and services. Some experts also credit the pandemic, which led to an increased dependence on e-commerce and mobile shopping, especially in certain markets such as the U.S. China, India and Australia.
Millennials and Gen Z have become the key target market of BNPL, relying on simplified credit solutions to help them manage their finances. For many of these generations, it is more difficult to be approved for a traditional credit card or loan due to their lack of credit history. However, with BNPL they can easily finance purchases without the need for a credit check and without incurring interest rates.
Additionally, BNPL has become a growing space for fintech and finance startups. With more and more startups dedicating themselves to BNPL services, it is thought that this payment method will continue to grow in popularity and attract further investment.
How does BNPL work?
Generally speaking, consumers will make an upfront payment towards the purchase, covering a proportion of the overall price. The rest of the purchase, they will pay off in a number of installments over a period of time. Usually, these payments are for equal amounts per month.
Unlike other forms of credit or loans, BNPL plans are often free from interest and are typically easier to be approved for. Additionally, they do not impact your credit score. However, just like loans or credit cards, if you fail to meet repayments on time, your credit score will suffer.
What is the difference between BNPL & credit cards?
BNPL and credit cards both are a form of delaying payments from the point of purchase and making repayment at a later date.
When you use a credit card, you will have to make the minimum payment due on the card per month. If there is any remaining amount that is unpaid, interest will build on this amount until you are able to pay it off in full. BNPL, on the other hand, does not charge interest rates for their services. That said, credit cards can be paid off at the consumer’s own pace whereas BNPL has fixed installment payments which, if missed, can incur additional fees.
One of the perks of credit cards is that some of them entitle their users to specific perks and rewards meaning that they can benefit from lifestyle benefits such as travel points or hotel rooms. Depending on the credit card, consumers could have the opportunity to earn cash back, air miles or other reward points. At this stage, this is not something that BNPL services are able to offer.
Additionally, credit cards can usually offer a higher maximum spending limit than BNPL. However, the flip side of this is that usually credit cards are harder to obtain than BNPL and will require stricter credit checks.
At this point in time, where BNPL is relatively new, it is limited to where you are able to use the service. Credit cards, on the other hand, can typically be used across a wider range of places.
When deciding between BNPL or a credit card, one of hte key differentiators will be the interest charges; if you are unable to meet your credit card repayments, you can quickly accumulate high interest rates and damage your credit score in the long term. This is something that will not happen when using BNPL.
Is it better to use BNPL or take out a personal loan?
BNPL can be viewed as a type of installment loan in that they are an arrangement which allows consumers to delay payment at the point-of-sale and pay off the full amount across various installments over a period of time.
Personal loans are funding that can be used for all purposes and typically enable the consumer access to a large amount of money. However, with this, personal loans come with a number of fees that are not incurred when using BNPL services. Additionally, BNPLs, unlike loans, offer revolving credit whereas loans are one-time payments.
When using BNPL, consumers are not subject to the same credit checks that are needed to take out a loan. Loan providers usually carry out thorough credit checks taking into account a customer’s spending history, job situation, age, income and credit score in order to determine loan eligibility. BNPL services, on the other hand, are far more digitalised, using quick checks to assess the borrower’s creditworthiness in a matter of minutes. This means that it is often far easier for consumers to use BNPL services than it is to take out a loan.
What are the benefits of BNPL?
The major benefit of BNPL is that you can pay off big purchases across monthly installments meaning that people are better able to manage their finances. By delaying full payment, and reducing it into monthly manageable payments, big purchases become more affordable. Additionally, and this is one of the main attractions of BNPL, these repayments are interest-free so the consumer does not have to worry about paying extra by distributing the payments over a longer time period.
One of the key selling points of BNPL, and one of the reasons they have gained popularity so quickly, particularly with the younger generations, is that they involve quick and simple approval, Unlike traditional lines of credit or more formal loans, consumers do not have to undergo a thorough credit check in order to use BNPL services. This means that, not only is it quicker, it also does not have the potential to negatively impact long term credit score and reduce future borrowing power. However, if payments for BNPL are missed, this can still incur fees and can impact consumer credit score.
BNPLs are becoming increasingly available across different retailers, both in-store and online, meaning that consumers can start to rely on these services more to cover their spending needs. From ride-sharing, to online grocery shopping to e-commerce, consumers can start to benefit from BNPL services in more and more sectors. This means faster transactions and no need to rely on card details in the same way that you do with traditional credit cards.
What are the potential downsides of buy now, pay later?
BNPL has been linked to overspending, especially in the younger generations, The ease and accessibility of the services means that, unlike traditional credit or loans, BNPL users are not scrutinised to see if they can actually afford these repayments. This means that many consumers enter into BNPL agreements without being able to afford the monthly repayments on time, incurring fees for late payments and ultimately costing themselves more money.
Even though the majority of these BNPL plans are interest-free, not all of them are. Consumers can often choose to use BNPL services thinking that it is a cheaper option. However, it is very easy to overspend. If you use BNPL to finance all of your purchases, you can quickly find yourself with very high monthly outgoing payments that may work out to be more expensive.
Because BNPL is still relatively new, not all retailers accept this form of payment meaning that BNPL customers are typically more limited than consumers who opt for a loan or credit card to finance their purchases.
