Which Is Right For You? – Forbes Advisor

Buy now, pay later (BNPL) lending is also known as point-of-sale (POS) lending. This type of loan is a popular and convenient way to make larger purchases at retail stores and, like credit cards, the products allow customers to make a purchase and pay it off over time—usually in a set number of installments. Deciding which one is better than the other depends entirely on the buyer’s financial situation and goals.

What Is Buy Now, Pay Later?

Buy now, pay later (BNPL) programs are a type of short-term financing provided by and accepted by many retailers across the U.S. (both in-store and online). BNPL services provide customers with a loan to be paid off in a few weeks or months.

Some online retailers offer BNPL options during checkout where customers can get instant approval. However, many consumers can download popular BNPL apps and sign up to use them with qualifying retailers. Afterpay, Affirm and Paypal are a few popular options. Each has different terms that lay out interest rates, payment plans and retailer networks.

How Buy Now, Pay Later Programs Work

BNPL programs usually require an upfront payment as the first installment, like 25% of the total purchased amount. The next installments are fixed amounts that may be subject to interest or a set monthly fee.

Customers can shop via the BNPL app or on qualifying retailer’s websites. During checkout, customers can choose a payment schedule to determine the amount due each week or month. If the loan for the purchase is not paid off in full by the end of the installment period, the customer could be subject to a late fee and it could reflect poorly on a credit history, similar to making a payment with a credit card.

What’s the Difference Between BNPL and Credit Cards?

BNPL apps and credit cards have one main similarity: Both allow customers to pay off a purchase over a period of time with periodic installments. However, significant differences do exist between two payment options. One major difference is that BNPL apps are only accepted by specific retailer-lenders, whereas credit cards are far more widely accepted.

Credit cards give cardholders a minimum monthly payment that may or may not be fixed. Cardholders can choose a timeframe to pay off purchases but will be charged interest monthly if the entire balance is not paid down by the end of a billing cycle.

Many BNPL apps issue loans with fixed payment installments for every purchase. Some may not charge any interest or late fees, but each service differs.

There are, of course, pros and cons to everything:

Credit Card Pros

• Minimum monthly payments can be paid off over a longer period of time, though we never recommend carrying a balance
• Can be used for nearly any type of purchase, including retailers, gas stations, grocery stores, bills and more
• Potential to earn rewards, like points, miles or cash back
• Potential to benefit from other perks, like welcome bonuses or rental car collision damage insurance
• Opportunity to improve credit score with responsible spending

Credit Card Cons

• Application process can take longer
• Interest accrues if purchases are not paid off in full by the end of each monthly billing cycle. We never recommend carrying a balance if it can be avoided
• Applying for a credit card typically results in a hard credit check (which can negatively impact credit scores)
• Fees may include annual fees, foreign transaction fees and late payment fees

BNPL Pros

• Fixed monthly installments (sometimes with no interest)
• Choose-your-own payment frequency
• Can get instant approval and apply it to purchases right away
• Hard credit checks not always required

BNPL Cons

• No reward potential
• Only accepted by some retailers
• May be charged interest on purchases or late fees for late payments
• More difficult to increase credit score with responsible spending

Which Is Better: BNPL or Credit Cards?

Deciding whether BNPL programs or credit cards are better for use in financing purchases depends on the customer’s financial situation and long-term goals. The BNPLs are typically only accepted by online or in-store retailers whereas credit cards can be used to make almost any type of purchase.

When shopping around for a BNPL product, pay attention to the retail network, payment plan options, any existing late fees or interest charges, refund policies and whether the lender performs a hard credit check. Some BNPLs could be a good option for those who have low credit scores or a short credit history, as the criteria to be approved is often less stringent that that of most credit cards.

If increasing a credit score or building a credit history is your goal, credit cards are a much better option. Most BNPLs don’t report spending activity to credit bureaus. On the other hand, major credit cards report spending and payment activity to the three major credit bureaus. Responsible spending habits like on-time payments and keeping credit utilization rates low will increase a cardholder’s credit score. In addition, because borrowing by means of BNPL is similar to taking out a loan, too many loans that are opened and then closed could lower a credit score.

Some card issuers offer versions of BNPL, enabling for cardholders the benefits of BNPL without requiring a new sign up. For example, Chase’s My Chase Plan® offers cardholders the ability to repay a purchase of $100 or more in equal monthly installments for a fixed monthly fee. Current cardholders should check with a card issuer to read the fine print before signing up for a BNPL service.

Bottom Line

Buy Now, Pay Later services are useful for those with poor credit, no credit history or simply the desire for convenient payments: Customers can get approval within seconds and make a purchase right away. The purchasing power is limited, however, because customers can only use BNPL at qualifying in-store or online retailers.

Credit cards can be used to make a wider array of purchases beyond retail. Credit cards (when used responsibly) can help build a cardholder’s credit history, which is useful when applying for other types of loans, like a mortgage or car loan. Many landlords even check credit history when evaluating whether or not a rental applicant will make a good tenant. Check with a card issuer first to see if they offer a BNPL program before signing up for a new service, but always read the fine print.