What You Need to Know About Buy Now, Pay Later Loans

These days, you can buy almost anything online, including big-ticket items like furniture, jewelry and appliances. Traditionally, you may have financed these items through an in-store credit plan. However, many retailers are now working with loan providers to offer more flexible financing options. One of the most common is the buy now, pay later (BNPL) loan.

BNPL loans have been gaining popularity as a flexible payment method for consumers. Many prefer them because they allow shoppers to purchase items at checkout and pay for them over time, typically in interest-free installments.

While these loans may be helpful financing options, you'll need to determine if they fit your financial situation. Here’s what you need to know about how BNPL works, its impact on your credit and potential risks.

How buy now, pay later works

BNPL loans are fairly straightforward. You buy something from a retailer but don’t pay the full cost upfront, making smaller payments over time. Depending on the item’s cost, the time it will take to pay it off may range from several weeks to a year or more. 

Some of these plans are interest-free and offer low rates while others charge interest. Often, the retailer pays a fee to a third-party lending company to handle the financing.

BNPL loan application process 

The BNPL loan application process is also relatively straightforward, but it's important to proceed with each step carefully. This can help ensure there are no delays or issues with approval.

Here's how the BNPL loan application process works:

1. Finding a BNPL loan provider: You'll need to choose a BNPL loan provider that works with your chosen store. These can be retailers, financial institutions or dedicated BNPL platforms.
2. Setting up an account: You may be required to create an account with the BNPL provider. This may also be when the provider performs a soft credit check.
3. Choosing a loan repayment plan: After setting up your account, you'll need to choose a repayment plan that fits your financial situation. BNPL providers typically offer various installment options.
4. Reviewing and confirming your application: After carefully reviewing the terms and conditions—including interest rates, fees and the repayment schedule—you'll submit it for approval.
5. Finalizing your purchase: Once your application is approved, you can complete your purchase. The BNPL provider will pay the retailer on your behalf. Then, you'll be responsible for making the payments to the provider.

Pros of BNPL loans

Let’s start with the positives. BNPL loans can be very convenient, especially for big purchases. From potential interest-free payments to flexible financing options, these loans are a go-to option for many consumers.

Here are some of the top benefits of using BNPL loans.

Potential interest-free payments

Many BNPL services offer loans with interest-free installments, making it easier to manage finances without accruing additional costs. This can make for less stressful financial planning, enabling you to spread the cost of purchases without worrying about accumulating interest. 

Budget-friendly payment plans

BNPL loans allow you to break bigger purchases into smaller payments. This flexibility can help you select payment frequencies, catering to your income flow and financial commitments.

Approval without a high credit score 

If you have a low credit score, you can typically still be approved for a BNPL loan. By focusing on alternative criteria, BNPL providers offer services to a wide audience. 

Pairing with seasonal and promotional offers

BNPL providers often collaborate with retailers to offer seasonal promotions and special deals. These offers may include extended repayment periods, reduced fees or exclusive discounts.

Cons of BNPL loans

Despite their potential benefits, BNPL loans can also have some downsides. Here are some of the most common issues.

Overspending risks

The flexibility of installment payments may make it easier to accidentally purchase items beyond your budget. This can put a strain on your bank account as the debt stacks up.

Potential late fees 

Missing a payment may result in late fees, which could accumulate over time. This increase in debt can make it harder to pay back the loan.

Limited purchase protection

Regulatory frameworks that include strict requirements for consumer protection may not yet fully apply to BNPL services. This could leave consumers vulnerable in cases of transaction issues.

Potential dips in your credit score

While many BNPL options don't directly affect your credit score, some may send a report to credit bureaus after inquiries. This could cause your score to dip. In addition, new BNPL accounts can shorten the average age of your credit accounts, also potentially lowering your score.

Choosing the best BNPL loan option

Not every BNPL plan is the same. They vary by repayment terms, the amount lent and many other factors. To determine which type is best for you, we encourage you to consider the following:

• Payment flexibility: Look for providers that offer payment schedules that align with your finances. It's important to read the terms carefully and ensure you can meet the repayment schedule. Whether you prefer weekly, bi-weekly or monthly payments, ensure the plan is manageable.
• Approval process: Consider the approval requirements and make sure they fit your circumstances. For example, if you have a low credit score, look for providers that don’t require hard inquiries.
• Integration: Check if the BNPL service is integrated with your favorite retailers to help create a smooth purchasing process.
• Customer service and support: Quality customer service and support can make a significant difference in the BNPL process. Look for providers known for responsive and helpful service.
• Security and privacy: Consider what security measures the BNPL provider uses to protect your debit or credit card information, account details and more. Read through their privacy policy to understand how your data will be used and safeguarded.

Navy Federal Credit Union can help you make the most of BNPL 

Deciding if a BNPL loan is right for you is a big decision. As a Navy Federal member, our personal financial counselors can help assess your overall situation and see how BNPL might fit into your budget. They offer assistance with goal setting, budgeting and finance management to support you every step of the way.

We can also help you stay on track with your BNPL monthly payments. Use our simple loan calculator to help estimate your payments so you're prepared for each installment. Note that this calculator may not consider the loan’s specific repayment terms.