Is Buy Now, Pay Later a better option than credit cards?

It is hard to ignore the popularity and growth of the Buy Now, Pay Later (BNPL) payments/loans. What started as a solution for younger people with thin or no credit history has been adopted by many in both prime and sub-prime credit segments. BNPL is not a new concept; it has existed in various forms for a long period of time. For e.g., when someone buys an expensive smartphone on a 24-month installment plan, that is also a form of BNPL. If BNPL was not an option, people might have used a credit or debit card to make that purchase and sometimes they might not have made a purchase at all. It appears that it is a great option for merchants who are getting a sale that might not have happened and consumers are getting a product that otherwise they might not be able to afford. Sounds win-win for both parties, right?

Not so fast!!

Although BNPL seems a great option for consumers, it is not always that black and white. Like everything in life, there are some pros and cons of BNPL for consumers that should be understood before going all-in. We are not trying to scare people off BNPL. In many cases, it is a great option to make a purchase. It also depends on personal circumstances and individual discipline. This post is not about personal finance or budgeting, but the goal is to highlight some potential pitfalls that may apply to some consumers. Let’s look at these pros and cons.

Pros of Buy Now, Pay Later!! Yay!!

1. Budget-Friendly: You know how much you have to pay each month so that you can budget easily. This is a big advantage over credit cards ( for people who do not pay off the total credit card balance each billing cycle). Once you put a purchase on a credit card, the credit card issuer will take into account the previous balance and all other purchases to determine the minimum amount due. That minimum due can vary month-to-month. So you really have no idea at the time of purchase the additional amount you need in your monthly budget. In the case of BNPL, you know exactly how much you will be paying each month for that purchase. Love the transparency!!
2. Time Boxed: You know the number of weeks or months it would take to pay off that purchase. It is a big positive for BNPL. With credit cards, once you put that purchase on the card, you have no idea how long it will take to pay off unless you pay off your entire balance, which could include other purchases that you might have made on that card. On the other hand, with BNPL, you know exactly when your purchase will be paid off before you make the purchase. This could help with budgeting or planning your next purchase.
3. Credit Friendly: It may not impact your credit history. Many BNPL lenders don’t check your traditional credit bureau or don’t perform a hard credit pull, which means your credit score is not impacted. Usually, a new credit pull has a negative short-term impact on your credit score. You can avoid that short-term blip if you use a BNPL solution. A new application for a credit card will have a hard hit on your credit score.
4. Instant gratification: Immediate purchase and shipment of items: Once you are approved for a BNPL loan, you can make a purchase right at that moment. As a matter of fact, the BNPL application is usually integrated inside the buying process. On the other hand, with a credit card, once you get approved it could take days before you will get the new card shipped, and then you will be able to use it for purchases. Some cards allow instant purchases.

Cons of Buy Now, Pay Later vs. credit cards!

1. Usually no rewards: Although some BNPL lenders have started to offer limited rewards, most don’t offer any cash back or points or miles. If you don’t qualify for a credit card then it is a moot point. But for a large number of customers, it could be a big deal, because they might be earning 1 more point per dollar or 1% or more in cashback.
2. Potential of overextending: Although credit cards long have been accused of letting people spend more than they can afford, the BNPL takes overspending to a whole another level. In the case of cash or debit cards, you can only spend what you have. Credit cards allow you to buy more than what you have on you or in your bank account, but you still see the full purchase amount hitting your credit card balance. But BNPL splits the full purchase cost into smaller chunks, and you could end up using different lenders. Those smaller chunks could add up to a large amount due every other week. It requires more discipline than credit cards if you want to avoid getting in trouble.
3. Credit bureau reporting: This one works both ways. As I mentioned that usually there is no hard credit pull, which works in your favor. But most of these lenders do not report the payments to the bureaus either, which does not help in improving your credit profile if you are making timely payments.

The verdict!

The BNPL is a great tool in your “wallet”, use is carefully and only when you can afford it. Do not overextend yourself, otherwise you will get in trouble. It may be good idea to use a basic word, notepad or spreadsheet on your phone to keep track of all BNPLs that you have active, and make sure you have accounted for each of them in your budget.