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Bottom Line Up Front

  • Buy Now, Pay Later (BNPL) financing is an installment-type loan that allows buyers to break up the cost of their online purchases into multiple payments, instead of having to pay the full price at checkout.
  • Not all BNPL plans are the same, and some can come with negative consequences.
  • Credit reporting agencies are beginning to factor BNPL into credit score calculations. 

Time to Read

5 minutes

December, 30 2022

These days, you can buy almost anything online—including big-ticket items like furniture, jewelry, appliances and more. Traditionally, these are items you might have financed through an in-store credit plan. Online retailers are increasingly offering e-commerce shoppers similar financing. It’s commonly known as Buy Now, Pay Later (BNPL). Here’s what you need to know about how it works, its impact on your credit and potential risks. 

What is BNPL?

BNPL is just how it sounds. You buy something from an online retailer, but don’t pay the full cost up front. Instead, you finance it—making multiple smaller payments over time. Depending on the item’s cost, how long it will take you to pay it off may range from 4 payments due every 2 weeks to multiple payments payable over several months or a year or more. Some of these plans are interest-free or have low rates, and some charge interest similar to credit card rates and fees. Often, the retailer pays a fee to a third-party lending company to handle the financing. 

BNPL has become increasingly popular, not only for big-ticket items but also for larger shopping trips. Here’s what happens:

  1. At checkout, you’re asked if you want to finance your purchase.
  2. If you agree, you’ll be shown the number of payments you’ll need to make to pay off the balance and how much you’ll pay each time. 
  3. Then, if you choose to continue, the lender may check your credit to see if you qualify. 
  4. If you’re approved, you’ll likely make the first payment at checkout and set up the remaining payments. 

Although this process seems pretty simple, it’s important to understand that entering into an installment agreement opens the door to both positive opportunities and negative consequences. 

On the Plus Side

Let’s start with the positives. BNPL is undeniably convenient—especially for big purchases. Here are some of the reasons many shoppers love it.

  • It’s quick and easy to use. A BNPL application is usually pretty short. Approval is fast (usually in minutes). And, the lender will probably do a soft credit check, which means it doesn’t affect your credit score.
  • Payments are budget-friendly. Bigger purchases are more manageable when you break the cost down into smaller payments over time. And, since many of these plans are interest-free, they’re more affordable than other types of credit. 
  • It makes access to credit easier. BNPL makes credit available to those who want to finance without turning to credit cards—or for those who may not have access to a credit card or who are just starting to build their credit.

Potential Drawbacks

Not every BNPL plan is the same. Answer these questions before you agree to this type of financing:

  • What are the terms you’re agreeing to? See whether you’ll be paying any fees or interest. How much are they? If the plan charges interest, check the rate and compare it to other credit options. (You may be able to find a lower-rate option.) See if there are penalties for missed or late payments. In some cases, a late payment can trigger a higher interest rate that will apply to the entire balance.
  • What if you need to return the item? If you need to return an item purchased with BNPL, you may have to continue making payments until the retailer reports the return to the lender. The same might apply for products that are lost.
  • Do you have payment safeguards? What happens if an automatic BNPL payment causes an overdraft on your checking account? If you have overdraft protection, what happens if it prevents your payment from going through? Make sure you understand what penalties you might incur from the BNPL lender as well as your financial institution. If you bank with Navy Federal Credit Union, learn how to protect your checking accounts

A Note About the Effect of BNPL On Your Credit Score

BNPL loans didn’t show on credit reports in the past, but that may soon change. Major credit reporting agencies are beginning to look at how BNPL data might figure as part of your credit score. They haven’t quite determined how exactly BNPL data will affect your score yet. But regardless of what they decide in the future, it’s a good idea to:

  • make sure you can afford the payments before you agree to this type of financing
  • always pay on time 
  • try to keep your total credit utilization to 30% or lower

In the right circumstances, Buy Now, Pay Later can be a simple way to finance online purchases you might not be able to budget for outright. Just make sure you’re taking the proper steps to avoid the pitfalls.

Some of our members use the two-account budgeting strategy that has one checking account set up for BNPL payments and another for regular expenses. Navy Federal Credit Union also offers our Card on File tool as a way to make payment management easier. You can easily link your Navy Federal credit and debit cards to the online merchants you shop with most.

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Disclosures

This content is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.