A new type of consumer credit rose its way to the top in the past few months, thanks to a global pandemic. Gen Z and millennials are now using this to pay for products the way their great-great-grandparents did – buying it now and paying it by installments. It allows people to get that one pair of boots just in time for autumn in the hopes of paying it off in a couple of weeks or months. 

39% of Americans say they’ve tried BNPL at least once, according to an early 2021 survey by The Strawhecker Group.

Also known as “BNPL,” this payment method is offered by startups like Klarna, Affirm, and Afterpay. Although the BNPL option is fast and convenient, it’s starting to rack up some serious debts for some people. Let’s check out how BNPL works then we’ll jump into the pros & cons. 

How does BNPL work?

To qualify for most BNPL firms, people get a soft credit check, which has no impact on their credit score. On the other hand, other companies may execute a hard pull of your credit, which may temporarily lower your score. Not all purchases may be eligible for BNPL financing, and the amount you may spend this way may be limited. Many individuals believe that this choice is superior when purchasing online, as its popularity rose in 2020 alongside e-commerce in general.

Pros

Nobody likes providers making money off of them by implementing sky-high interest rates when they forget to pay their balances. Like Sebastian Siemiatkowski, Klarna’s founder, puts it, “credit cards reward rich users who can pay them off, and penalize the less fortunate.” That’s why with the BNPL, more shoppers are flocking online stores with this new payment method for the following reasons: 

• It’s a simple and disciplined method to pay for things over time. 
• Frequently has a cheaper interest rate than credit cards. 
• It’s not required to have good credit or a high credit score to qualify. 
• Gives users fast approval.

As great as it sounds, there are downsides to the BNPL option. 

Cons

It’s possible that many people using the BNPL method struggle with establishing and building a good credit score. Also, the lack of perks in comparison to credit cards, such as cashback or reward points, is also a downside when using the buy now, pay later method. 

Bought something that you didn’t like and have to return it? Well, if you BNPL, it can get tricky. The money is refunded only after the merchant informs the BNPL lender of the refund. In the meantime, you would still have to make the installment payments. If you’re late to make those payments, they can be marked tardy or missing, which will eventually ding your credit score. All in all, BNPL financing can have these disadvantages:

• Payments can be hard to track.
• Missing or late payments result in late fees or damaged credit scores.
• No rewards or cash back earned on purchases.
• Payments may continue even if an item is returned

Think now, buy & pay later

BNPL finance may be a better choice if you can’t or don’t want to pay for anything all at once. However, before you decide to use it, think about whether the payments are feasible and what penalties you could face if you can’t make them. Read the small print for any BNPL firm to ensure that you understand all of the conditions you’re agreeing with.