Most consumers are now familiar with Buy Now, Pay Later (BNPL) or have at least heard of it. Similar to a Layaway plan, BNPL allows you to receive your items upfront and pay for them over time, rather than paying in full before receiving the items. Unlike Layaway, which typically involves longer payment periods, BNPL plans usually last around four months, with some extending a bit longer. After making an initial payment, you take your purchases home and continue making bi-weekly payments until the balance is paid off. Today, this service is offered by most major retailers.
BNPL gained significant popularity during the pandemic as more people turned to online shopping. It provided consumers with convenience and peace of mind by allowing them to spread out payments instead of paying a large sum upfront. Essentially, BNPL offers short-term installment loans with low or no interest rates. Several platforms are available for retailers to use, with the most popular being PayPal Credit, Afterpay, Affirm, Klarna, and Zip (Zip Pay). When making a purchase, you’ll typically be given the option to choose BNPL, fill out a few questions, and make your first payment.
BNPL can be a helpful option for many consumers, but it does come with potential downsides. If not managed carefully, it could lead to financial trouble, especially with the holidays approaching. For example, if someone makes purchases from multiple retailers using BNPL, they may find themselves having to make bi-weekly payments on several items for months. This could create an additional financial burden that may be hard to manage.
Can BNPL affect your credit? It depends on the platform. Most BNPL services don’t require a credit check, and if they do, it’s usually a soft pull. However, Affirm and PayPal perform hard credit checks, which could impact your credit score. Additionally, Affirm and PayPal report to the credit bureaus, while other platforms generally do not—at least for now. In December 2021, Equifax began including BNPL loans on credit reports if the loan term was longer than four months, and Experian and TransUnion followed suit. These loans appear only on personal credit reports, not on industry-specific reports like those for mortgages or auto loans. To date, only Affirm and PayPal appear on credit reports beyond personal reports. This can affect your credit, especially if you use BNPL across multiple retailers. For example, purchasing five items on a six-month payment plan through Affirm could result in five new installment loans showing up on your credit report.
As the credit reporting industry shifts toward the new scoring models, FICO 10T and VantageScore 4.0, BNPL loans are expected to become more visible and integrated into credit scores. However, it’s unclear exactly how these models will be impacted until they are more widely adopted.
BNPL transactions can be a great option for some people, as long as payments are made on time and there aren’t too many active transactions. Problems arise when there are too many BNPL purchases and payments are missed. If the provider reports to the credit bureaus, missed payments could appear on your credit report, potentially lowering your credit score. To avoid any issues, it’s important to research the BNPL platform you’re using. A helpful resource for comparing different platforms is Bankrate.com, where you can explore the pros and cons of each option and choose the one that works best for you.