What is Buy Now, Pay Later (BNPL) & How it Works?

What is Buy Now, Pay Later?

“Buy Now, Pay Later” (BNPL) is a financial service that allows consumers to make purchases and defer payment for them over time. Instead of paying the full price of an item upfront, customers can opt to pay for their purchases in installments. This model is often offered by third-party companies or integrated into the checkout processes of retailers. It is a form of short-term financing that permits customers to make purchases and pay for the items over a set period with no interest charges. Although this sort of financing is convenient and easier, there are some potential loopholes that one needs to consider. It is a flexible payment method to traditional payment methods. BNPL allows consumers to make purchases while extending the period of payment to a future date. This modern form of method applies to diverse financial preferences and situations. Commonly BNPL has been used in e-commerce, retail, and online platforms. Consumers use this service to purchase various daily consumables such as clothing, beauty products, electronics, and other physical goods.

Geeky Takeaways:

• Buy now, pay later is a contemporary and consumer-friendly form of short-term financing offering diversification from the traditional payment methods.
• These are loans, termed point-of-sale (POS) installment loans.
• Customers use this method to make purchases now and pay for them later over a specified period after an up-front payment.
• BNPL services are usually zero-interest loans.
• These loans are easier to obtain compared to traditional personal loans and credit cards.
• BNPL does not impact the credit score until and unless one pays late or fails to repay.

How Does Buy Now, Pay Later Work?

The service of buy now, pay later has multiple terms and conditions. However, generally, they are short-term loans with zero interest and fixed payments. One can use the BNPL app to purchase goods or use a credit card, one can utilize the BNPL option.

BNPL can be used to purchase at any participating retail outlet and opt for paying later at checkout. After approval by the participating outlet, a minimal down payment of 25% of the overall purchase can be made. The remaining amount can be paid usually within a few weeks or months with zero interest installments.

Customers can opt for auto-debit, for repaying their credit purchases via debit card, credit card, or bank account. Individuals can pay via cheque or bank transfer but per Consumer Financial Protection Bureau (CFPB) of the US allows consumers of BNPL to automatic payments only.

In India, this ‘buy now pay later’ system existed with the name “Udhar Khata” for decades and this system still exists in a few cities. At the local or ‘kirana’ stores, the shopkeeper manually keeps a record of purchases made on credit which would be paid on a later date by the customer. There are instances when we may run short of cash, but our expenses exceed. We need a gadget but do not have sufficient cash to purchase it. BNPL then comes to the rescue from this financial stress.

Generally, customers just need to choose the “buy now, pay later” option on the payment form when making a one-time purchase, and they will be taken to the provider’s website or mobile application to register or log in. Consumers decide whether to proceed with the purchase and accept the terms of the repayment plan, which usually include selecting between bi-weekly or monthly installments.

Businesses receive the whole amount upfront (less any costs) upon completion of the purchase. When customers pay on time, the buy now, pay later provider receives their installment payments straight from them, frequently without charging interest or other costs.

Buy Now Pay Later Trends

In the current scenario, the buy now, pay later option is on the rise as compared to earlier times of the 2000s. When there is an economic downturn with high interest rates and high inflation, BNPL can be a better option for repaying off credit purchases.

In the US, a report from CFPB in September 2022, mentioned that from 2019 to 2021, BNPL users grew from 16.8 million to 180 million offered by the five lenders in the US alone. Earlier BNPL was used for apparel and beauty products, but currently, there is a shift towards pet care, groceries, gas, and travel. The average range of BNPL is $50 to $1,000.

Companies such as Affirm, and Klarna offer BNPL loans to use in participating retail stores. Chase and American Express issue credit cards that have BNPL options. In 2023, One, a majority owned by Walmart has planned for similar financing services.

Additionally, in March 2023, CFPB reported that BNPL service users were having bank overdrafts, payday loans, pawn loans, and other high-interest financial products, highlighting that the users are financially more vulnerable than the non-users of BNPL facilities.

The CFPB also found that Black, Hispanic, and female consumers on average used this service more among all the users and most of the users belong to household incomes ranging from $20,000 to $50,000.

How ‘Buy Now Pay Later’ Affect Your Credit?

Usually, BNPL service providers do a minimal credit check for approval which does not affect the credit score. But if the providers opt for a hard thorough credit check, then this might lower your credit score. Sometimes, your credit report might be checked by all the credit bureaus which would reflect on your credit score report, pulling down the score.

Thus, it is always advisable to repay the installments in time so that your credit score is not affected. The monthly installment should be regularly paid once you agree to the BNPL loan. If you fail to repay or delay repayment, you will be termed defaulter and your credit score will be highly impacted.

Which Apps Let You Buy Now, Pay Later?

Several apps and platforms let you buy now and pay later. Some of them have been mentioned below:

1. Afterpay: A commonly used ‘buy now pay later’ service is the one offered by Afterpay. Here, users are allowed to spread their purchase payments into four equal installments for two months. No extra charges are applied if payments are made on time.

2. Klarna: This provider permits flexible payment options including installment payments. Users can either split their payment or delay the payment period depending on their choice. Different online retailers have integrated Klarna into their business.

3. Affirm: This app offers point-of-sale financing. Here, users can split their purchases into monthly installments. They provide transparent terms and interest rates. Further, users can check their eligibility without affecting their credit score.

4. Sezzle: This app also offers interest-freeinterest-free installments to users. The users can pay on every two weeks. Sezzle provides access to variant financing options for users based on their credit histories.

5. Quadpay: Another app, Quadpay, allows users to spread their purchases into four payments over six weeks including free interest. Various online and retail stores have integrated Quadpay into their system for flexible payment options.

6. Potlee: Potlee offers customer-friendly payment options with hassle-free registration and comprehensive solutions for credit-related issues. It is one of the best BNPL apps available in India.

7. Amazon Pay Later: With the concept of BNPL, Amazon launched this platform in 2018. Hazzle-free process for using this platform and it gives the flexibility of repayment within 3 to 12 months. No extra charges are levied if loans are closed on an early basis.

8. Flipkart Pay Later: Flipkart initiated this program in 2017, and millions of users have been using it. A repayment period of 30 days post-purchase is applied. An instant credit limit of 1 lakh is offered along with interest-free payment up to 35 days of purchase.

9. Freecharge: Launched in 2010, it has become one of the popular BNPL apps with multiple users. If users pay any interest, freecharge returns those interest as cashback which can be used in the upcoming payments. Users are allowed to give full payment or split their purchases at the lenience them.

10. Lazypay: This app was launched in 2017. It offers flexible options of repaying as 3 months, 6, or 9 months. The users can also choose to pay within 15 days. Zomato, Dunzo, Tata Sky, MakeMyTrip, GoIbibo, and some well-known retailers have used this platform.

Risks of Using BNPL Apps

There are certain risks associated with using BNPL apps.

1. Repayment Terms and Conditions: Before diving into any BNPL loans, read the repayment conditions carefully as these vary from provider to provider. For instance, some companies might give you bi-weekly installments over a month-long period repayment option while some others might offer 3 months, half-yearly, or year-long period to pay off your credit purchases.

2. Late Fees: If you delay your payments on time, then the BNPL providers charge you late fees which might hamper your budget plans. Hence, it is advisable to plan your purchases and repayments accordingly so that it does not affect your budget plans. Further, your late payment history might be sent to the credit reporting bureau which might affect your credit score as well.

3. Purchase Return Policies: Before purchasing on BNPL, always ensure the terms and conditions of the return policy. In some cases, the merchant might allow you to return the item, but won’t allow you to cancel the buy now, pay later setup until and unless the return has been accepted or processed. Thus, it is important to consider the return policies of the BNPL providers.

Should You Use Buy Now, Pay Later?

Buy now, pay later (BNPL) scheme should be used by individuals as they come with a lot of benefits:

1. Convenience: The buy now, pay later option helps individuals purchase goods without paying the entire amount upfront. Thus, one can purchase high-end products with comfort even if he/she is on a tight budget.

2. No Interest or Fees: Most of the BNPL providers offer interest-free payments which makes it easier for consumers to spread their costs without incurring additional charges.

3. Flexible Repayment: You have the option of choosing your feasible repayment period. The period ranges from a few weeks to several months.

4. Easy to Use: Buy now, pay later loans are easy to use as they are simple, secure, seamless, transparent, and comfortable to use. No providers offer lengthy forms to collect purchasers’ information.

Pros of Buy Now Pay Later

1. Manageable Payments: Users are in control of their payments and consumers can decide on their own when and how to repay their loans.

2. Zero-Interest Charges: Often BNPL offers free interest payments if paid within the payback period.

3. No Credit Check is Done: BNPL platforms offer loans on purchase without checking their credit history. Anyone can avail buy now pay later option which is convenient and flexible to use.

4. Available Widely: The hassle-freeBNPL platform is a popular way of repaying loans and purchases. Across the globe, multiple companies and retailers have initiated this platform and made hassle-free payments for consumers.

5. Flexible and Convenient: The buy now, pay later scheme is flexible and convenient to use as they have the option of choosing which best suits each consumer.

Cons of Buy Now Pay Later

1. Overspending Risk: Although the users can manage their payments, sometimes due to unconsciousness, consumers can overuse their credit limit which might incur heavy disbalance in their budget.

2. Late Fees: On delay of repayment, some platforms charge minimal fees as late fees

3. Doesn’t Enhance Credit: Using BNPL platforms for payment purposes or availing loans through this app, your credit score does not get impacted.

4. Debt Trap: If consumers operate without reading the terms and conditions, then there might be an option that the consumer might face a debt trap. BNPL has the potential to debt trap users.

5. Limited Purchase Protection: BNPL offers a certain period of payment within which the purchase should be paid and also can be used.

What Credit Score do you need for a Buy-Now-Pay-Later Plan?

There is no requirement for a minimum credit score to enroll in a BNPL plan. When you apply, some service providers won’t even check your credit report or score. To determine your creditworthiness, some companies use a mild credit check.

What are the Dollar Limits on BNPL Loans?

The dollar limits on the buy now, pay later policy vary from retailer to retailer and provider to provider. It can typically vary from several hundred to several thousand dollars. Some offers have an overall restriction as well as a per-purchase limit. Before making a large purchase at the store, it is advisable to check that out.

What is the Interest Rate on a BNPL Loan?

As long as you make your payments on time, the majority of services have no interest. If you don’t pay on time, then interest rates can go as high as 36%. Additionally, the buy now, pay later (BNPL) loans have the potential to impose late fines, which are usually $7 or $8, as per the Consumer Financial Protection Bureau (CFPB).

How do you choose a Buy Now Pay Later Provider?

You should select your BNPL provider carefully as all providers have their set of terms and conditions. One should keep in mind the following conditions before selecting the provider:

1. Repayment Terms: Different providers have different installment options, term lengths, and payback periods. Suppose, a business has a high average order value, then they should opt for long-term installments (monthly installments spread over six months). On the other hand, businesses or individuals having lower average order value, then they should opt for a shorter installment period (say four installments in six weeks).

2. Credit Limits: This is customized for every customer based on their usage, credit history, and repayment history. However, some BNPL providers offer maximum and minimum credit limits. Thus, it is necessary to check the credit limits of the providers before availing the offer. Evaluate and analyze your average order value and select a provider who aligns with your credit lines and allows hassle-free purchase.

3. Customer Location: This pointer applies to those who offer the buy now pay later plan to its customers. Based on the customer base and location, the provider of BNPL must be selected. One can offer multiple BNPL providers to optimize its geographical coverage. The most popular buy now pay later providers can be selected based on location, such as Afterpay and Zip can be offered in Australia while Klarna can be offered in Germany and the Nordics being the most popular BNPL companies.

Alternatives to Buy Now Pay Later

1. Personal Loans: Individuals can opt for personal loans if they don’t seek credit. Although personal loans come with interest charges, these charges are minimal and they are lower than the late fines applicable in BNPL platforms. This further helps to build credit where BNPL cannot create.

2. Secured Credit Cards: If someone is not eligible to apply for traditional credit cards, to avoid additional hidden charges, one can apply for secured credit cards. Here, the users can deposit an amount they want, and that amount can be used as a credit limit to their card. It is one of the best alternatives to the buy now pay later service. This secured credit card can also build credit.

3. 0% Interest Credit Cards: This credit card offers a credit period of up to 12 months with zero percent interest charge. It is much better than BNPL as there are no hidden charges after the payback period. The deferred interest that is levied on these credit cards applies to only the remaining amount rather than the whole principal amount.

Frequently Asked Questions (FAQs)

Is ‘Buy now, pay later’ a good idea?

The answer for this question lies in individual perspective based on personal financial positions, status and conditions. For disciplined individuals, BNPL is a good option for budgeting as it makes payments easier and convenient. Also, careful considerations must be taken to avoid potential debt traps.

Why is BNPL growing?

With the advent of technology and flexible payment systems, consumers prefer hazzle-free purchase and payment systems. Modern young geenration prefer installment based payment rather than traditional based payment systems.