What is Buy Now, Pay Later?

Buy Now, Pay Later, also known as BNPL, gives buyers the opportunity to pay for a portion of their purchase up front and pay the rest off over time, in interest-free scheduled payments. This type of payment plan is becoming increasingly popular, especially when it comes to online purchases. Some popular providers of this service include Affirm, Klarna and AfterPay. There are also larger credit card companies that are starting to provide this payment option as well. Learn more about BNPL, how it differs from a credit card and things to consider when selecting this at checkout. At Dominion Energy Credit Union, we want you to understand all financing offerings in this ever-changing world so that you can feel confident about how you buy the things you want and need.

How does it work?

BNPL is an easy option that is offered to you at checkout from participating retailers. The process typically goes as follows:

• You make a purchase and choose “buy now, pay later” when checking out
• You make an account with the provider, providing basic information and a payment method
• If approved, you make a small down-payment, usually about 25% of the total price
• You pay off the remaining balance in interest-free installments
• You can pay from your credit card, debit card or bank account

When you go to check out online, if there's a BNPL option available it will typically be presented at that time.

How is BNPL different from a credit card?

Although it may not seem like it at first glance, there are big differences between using a credit card to pay for a purchase vs. using BNPL. An important difference to note is that when you are using a credit card to pay for your purchase in full, you are only required to make the minimum payment due on your credit card each month. You are then charged interest on the remaining balance of your card until it is paid off in full, but you can carry that balance indefinitely. On the other hand, there are no interest fees when you use BNPL, but there is a set payment schedule. You are told what you need to pay upfront, as well as the schedule of payments that will follow. The payment schedule is usually set across a few weeks or months.

BNPL vs. In-Store Financing

Another option offered by retailers, not to be confused with BNPL, is in-store financing. This option usually has deferred interest financing, meaning that you have a set amount of time to pay off the total and if you do not, then you will accrue interest. The purchase is also typically put on a store card credit card that you must apply for. The upside of in-store financing, compared to BNPL, is that you will generally have a longer period of time to pay off your total balance. BNPL will give you around 4-6 installments and in-store financing will give you closer to 12-24 months. If you are looking to make a large purchase and spread the payments out over time, then in-store financing may be the way to go for you.

Will it affect my credit score?

Most of the time, BNPL does not affect your credit score. This is because when being approved for this type of payment method, usually only a soft check of your credit is run which does not hurt your credit score. However, in some cases there is a hard pull of your credit, which may impact your credit score for a couple of months. 

Another instance that BNPL would affect your credit score in a negative way is if you have made late payments or have missed payments. If the loan was reported to the credit bureau, the inconsistent payments can be visible on your credit report and will impact your score.

What are the pros and cons of BNPL?

The benefits of choosing to use BNPL are:

• It is a convenient, disciplined way to pay for purchases over time
• There is frequently zero-interest or lower interest than some credit cards
• You don’t need a high credit score to qualify
• There is fast approval

Some of the downsides of BNPL are:

• Payments can be hard to track
• Missing or late payments result in late fees
• Late payments can damage your credit score
• You can’t earn benefits like cash back or other travel points on purchases like you can on a rewards credit card
• Payments may continue even if the item is returned
• You could end up spending more than your budget allows

So, what’s the verdict?

BNPL offers convenient repayment options to buyers who are looking to pay off their purchase in interest-free increments. The process is quick and easy, however you need to be prepared to pay the increments on the due dates indicated, otherwise your credit score could be negatively impacted.

If spreading out the payments for a purchase over a few weeks works better with your budget, then BNPL is a great option for you to explore! If you still have questions, contact Dominion Energy Credit Union or visit a Virginia branch.