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For many consumers, the ease and flexibility of spreading payments over a longer period of time makes "buy now, pay later," or BNPL, plans appealing.
Add in the possibility for lower interest rates, and BNPL is becoming an increasingly popular alternative to using a credit card. According to a 2021 study by C+R Research, 56% of BNPL users surveyed said they prefer using BNPL over credit cards for these and other reasons.
BNPL definitely has advantages over credit cards for some consumers in some situations. But credit cards have advantages in others. Which option makes the most sense for you depends on several factors, including how much you’re spending, how much it will cost to carry the debt and how quickly you can pay it down.
Ask yourself these questions to determine which option, if either, is right for you.
How much can I afford to pay upfront?
Most buy now, pay later options require you to pay a portion of the total purchase upfront, while the rest is broken up into equal installments that are due over a set period of time — usually six weeks. This popular “Pay in 4” model is offered by most of the largest BNPL services, like Afterpay and Klarna.
Having to pay upfront for smaller purchases might not affect your immediate cash flow, but for larger purchases, it can be difficult to manage. For example, if you make a $2,000 purchase with a buy now, pay later loan, you’ll have to pay $500 immediately upfront. And the higher the total amount of your purchase, the steeper the required amount due at checkout will be.
Plus, if you take out multiple such loans at once, you might end up shelling out more cash than you can afford. (Four $1,000 loans around the same time requires $1,000 upfront in total, for instance.) According to a Barclays UK 2021 study, 36% of BNPL users surveyed admitted to using the loans to spend more than they can afford, and an equal number of users said they did not fully understand the ramifications of missing repayments.
Like BNPL loans, credit cards can also help consumers make purchases they don't have the immediate cash for. But one main differentiator is that when you make a purchase with a credit card, you won’t be required to pay anything upfront. So if you charge a $2,000 purchase on a credit card, that amount will be added to your card balance — a portion of which will be owed at the end of the monthly billing cycle. (More on this below.) Because you don't have to pay any amount upfront when you make your purchase, paying with a credit card can lessen the initial financial burden of repayment.
How much time do I need to pay off my purchases?
If you make your BNPL payments on time and pay them in full, you won’t incur any interest or late fees. But if you miss your payments, there can be late fees charged and your debt could be sent to collections.
Similar penalties apply for missed credit card payments: Late payments can incur interest and late fees, and can negatively impact your credit score. However, an important distinction between the two financing options is that while you’ll only have a set period of time to pay off a BNPL loan, you can roll debt over on a credit card from month to month.
Credit card considerations
While it's advisable to pay your balance in full every month to avoid incurring interest, larger purchases on credit cards might necessitate carrying a balance and paying it down monthly. But unlike most buy now, pay later loans, there’s no set time frame within which you’re required to pay off your total purchase. Rather, at the end of each monthly billing cycle, you’ll have a balance, of which you’ll be required to pay a monthly minimum, plus interest. This minimum will vary based on how much you owe and on your interest rate — typically 2% to 4% of your total balance, or a fixed amount anywhere between $25 to $35 if your balance is low.
Remember, however, that when you roll over your credit card balance and don’t pay in full, you’ll be charged interest — which can be high depending on your creditworthiness and how much debt you’re carrying. Plus, failing to pay the minimum monthly payment due can lead to a penalty APR, which is a hiked interest rate, and can also negatively impact your credit.
If your purchase is particularly large and will take some time to pay down, consider a 0% APR credit card. Such options come with promotional periods, typically ranging from 12 to 18 months, during which you won’t be charged any interest. This can potentially be a better option than taking on debt from a buy now, pay later loan. Note, though, that 0% APR cards typically require good to excellent credit scores to apply. And once the interest-free period ends, you’ll be responsible for paying the card’s ongoing interest rate on new purchases, as well as any remaining balance left from the promotional period.
With a typical “Pay in 4” buy now, pay later model, borrowers have to pay 25% of the purchase upfront, and then the remaining 75% in three payments over the course of six weeks. Such short repayment periods can not only make it easier to default on the loan, but it also means you’ll have to pay larger sums. A minimum monthly payment on a credit card could make more sense if you can’t afford to shell out a large amount of money at once. For example, a $1,000 purchase on a credit card that you don’t pay in full right away, or roll over, might mean that you’ll pay at least $20 each month, not including your interest rate and assuming it’s the only purchase on your credit card. But a $1,000 purchase with a buy now, pay later loan will cost you $250 per installment. And if you miss one of those required payments, you’ll be penalized.
While some of the most popular “Pay in 4” BNPL services don’t charge interest, there are still varying fees associated with delinquency. Zip (formerly Quadpay) users, for example, are charged a late fee of $5, $7 or $10, depending on which state they live in. And in addition to being temporarily prohibited from using the service, if you miss an Afterpay payment, you’ll be charged a capped late fee starting at $10 and no more than 25% of the initial purchase price.
In February, one of the three major credit bureaus, Equifax, announced that it would be the first to include buy now, pay later repayments on its credit reports. According to Equifax research, inclusion of on-time BNPL payments could increase credit scores. But late payments, on the other hand, could have a negative effect.
Additionally, there are longer-term buy now, pay later services that do charge interest, and these rates are often high. For example, Affirm can charge up to 30% APR depending on the store you’re making a purchase from and on your credit score. This is significantly higher than the average APR charged for cards that incur interest.
If you pay your loan off in the allotted six weeks, you’re off the hook and you won’t be charged any interest or fees. But because such short repayment periods can make it easier to default, consider whether you can afford to pay off your purchase within the fixed repayment time before opting for a buy now, pay later option. If you think you’ll need more time, you’re better off making your purchase with a credit card instead.
Which option am I eligible for?
When you apply for a credit card, the issuer performs a hard pull: It takes a survey of your credit history and scores, which indicates how risky of a borrower you are. When you apply for a BNPL loan, however, there isn’t a hard credit check performed to determine your eligibility to get one, and your score isn’t affected. This makes it easier for those with no credit or poor credit to be approved for a loan.
To this end, if you are unable to qualify for a credit card due to a poor credit score and you have to make a necessary purchase but can’t afford to pay for it in full upfront, BNPL can offer access to flexibility that a credit card might not. But in such cases, it's important to look for a servicer that charges no interest, like Afterpay and Klarna, and to make a plan for repayment.
Note that because BNPL servicers are not performing hard pulls, it means that applicants are not screened based on their ability to carry or repay a new loan. So even if you are juggling multiple BNPL loans, you’ll usually still have access to opening additional loans. That makes it easier for users to take on more than they can handle and can lead to a cycle of debt.
It's important to survey your finances before opting for a loan. And if you’re already carrying multiple loans, avoid taking on more debt by applying for a new BNPL plan.