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When you are about to make a large purchase, you may have received an offer at checkout to pay in installments. This is called a “Buy Now, Pay Later” (BNPL) offer and there is a growing trend among retailers to offer these instant approval point-of-sale loans.
Usually an external company is the one extending the offer, so when you use your Chase Sapphire card to purchase that Peloton bike, for example, if you choose to pay for it in installments, you are funding your purchase through a third party company. called Affirm and not Platoon itself.
Credit card companies have also stepped up, offering cardholders the option of making installment payments for a set amount instead of accumulating revolving interest charges.
These arrangements can be beneficial to both sellers and buyers, as the ability to make multiple payments over time can make a purchase more attractive to buyers and lead to more sales for sellers. But using a BNPL offer might not always be a wise move, especially if it entices you to spend more than you can afford.
Here’s what you need to know about BNPL.
How to buy now, pay later works
Using a Buy Now, Pay Later (BNPL) option to spread payments over a large purchase is like a personal loan in that your payments are split into equal installments over time, usually just a few months. These loans are often interest free as long as you make your payments on time and in full. This differs from a traditional credit card purchase which charges you interest for each month of balance, unless you are approved for a card with a 0% introductory APR offer on purchases.
Benefits of BNPL
- Can split your payments. This could make an expensive item more accessible since you don’t have to shell out a lump sum.
- There is no such thing as hard credit. Unlike applying for a new credit card, BNPLs are easier to obtain. This means that a person new to credit or who does not have a strong credit profile might find it more attractive to make a purchase this way.
- Simple to do. Online shoppers in particular can find the instant gratification of buying whatever they want in easy-to-understand terms as a preferable way to shop.
- Can help manage cash flow. A BNPL can help someone buy what they need on a payment plan that fits their budget.
Disadvantages of BNPL
There are a few potential pitfalls to be aware of with this type of financing offer.
- Conditions may vary. Before committing to a BNPL loan, it is important to know the terms of the agreement. For example, an interest rate of 0% may not last the entire term of the loan, leaving you with high finance charges down the line and there may be exorbitant penalties if you miss or miss a payment.
- Some come with a fixed fee. These types of programs add a fixed fee to your monthly payments, which can cost you more over the life of the loan than just purchasing the item.
- They don’t help build credit. If you pay on time, it won’t improve your credit. However, late payments can be reported and have a negative impact.
- May encourage overspending. The ability to refund an item over time can make a purchase more affordable.
Types of BNPL loans
Generally, there are two types of BNPL Loans:
- Interest-free loans. With these types of loans, the merchant pays a fee to the third party loan company rather than the consumer paying interest on the loan.
- Loans with interest. These on-the-spot loans allow the consumer to make the purchase on the spot, but with interest similar to that of a credit card.
Typically, both types of loans provide a definite period of time during which the loan must be repaid in full. So, for example, if the article you are interested in offers you a four-part interest-free installment plan on a purchase of $ 1,000, each month for four months you will make equal payments of $ 250. If you don’t make payments in full each month, you could be subject to penalties and other charges. And, if the BNPL came with a 0% interest offer and you are late or skip a payment, you may be subject to deferred interest charges, which will retroactively apply to the full amount. of the balance.
Differences between third party and BNPL credit card offers
The versions of BNPL offered by credit card companies differ slightly from third-party point-of-sale financing. On the one hand, they are not offered until you make the purchase. But they will appear as an option on Qualifying Purchases on your statement. And, these plans come with a monthly payment fee, added to your installment plan.
Some may find these offers even more convenient than a third-party business loan, as you just have to decide after making the purchase whether you want to split payments using a line of credit you already have. And, if you use a rewards credit card to make the purchase, you’ll earn points as well.
Popular BNPL companies
Affirm has partnered with several well-known brands ranging from Pottery Barn to Expedia and can offer customers the choice at checkout of a short-term offer at 0% interest or up to 12 months with an APR of from 10% to 30% based on creditworthiness. There are no late fees, prepayment charges or deferred interest charges. If the retailer you wish to purchase from is not already an Affirm partner, you can obtain a virtual card number from Affirm to complete your purchase and refund Affirm using the payment plan you have selected.
Afterpay offers a short-term payment plan through its app. You download the free app to purchase your item using a virtual credit card number, then make the first of four payments and the rest is spread over six weeks. Afterpay will put a limit on how much credit they’ll give you, so you don’t overextend. Make your payments to them on time, or your account will be suspended and you could be hit with late fees of up to 25% of the item’s purchase price.
Klarna offers an interest-free “Pay in 4” plan that allows buyers to split any purchase into four installments. They also offer a “Pay in 30” package on certain purchases. If the retailer you are shopping with is not already a Klarna partner, you can download the Klarna app and make any purchase online through Klarna. If you miss or skip any of your four payments, you will be charged a late fee of up to $ 7.
But, if you have a “No Interest If Paid in Full” plan and you cannot make a payment, be aware that you will be charged deferred interest on the entire purchase at the rate of 19.99%. TAP.
Previously known as Bill Me Later, PayPal Credit offers installment plans for purchases of $ 99 or more, with no interest if paid in full within six months. Unlike some of the other BNPL plans, PayPay Credit is a line of credit issued through Synchrony Bank, so there will be a credit check for approval.
If you do not pay your balance in full, you will be subject to deferred interest on the full amount of purchases at the 23.99% variable APR rate.
Zip offers a four-installment payment plan spread over six weeks. You will pay 25% of the total cost of the purchase up front using your debit card or linked credit card, and the remainder of the payments will be split into three additional installments, each due two weeks apart. Zip does not charge any interest or fees if you make your payments in full and on time.
If you pay late, you will be charged a late fee of $ 5, $ 7, or $ 10 depending on the state you live in.
Sezzle offers a reimbursement program for eligible people consisting of four payments spread over six weeks. When you shop with a merchant that offers Sezzle, you pay 25% upfront of the total cost of the purchase from Sezzle, and the remaining payments are spread over three more installments, each due two weeks apart. There are no additional fees or interest as long as you make your payments on time. If you pay late or miss a payment, you will be charged a late fee.
Be aware that you may not be approved for expensive purchases the first time you use Sezzle. The company partially bases your limit on past payment history with Sezzle and says that if you’re turned down for a purchase made through Sezzle, making smaller purchases over time can help boost your credit with Sezzle. Keep in mind that Sezzle doesn’t report to the three major credit bureaus, so no matter how much you can spend through Sezzle, it won’t impact your credit score.
Credit card plans
American Express Pay It Schedule It
Amex’s Pay It Plan It feature allows cardholders to split eligible purchases of $ 100 or more into fixed monthly installments when you charge your purchase to an eligible card. You can combine up to 10 purchases on your account. Each monthly payment will come with a fixed monthly fee which you can consider in advance before deciding if this option is right for you.
My pursuit plan
My Chase Plan allows Chase cardholders to divide the cost of a purchase of $ 100 or more into equal monthly payments without interest. A fixed monthly fee is added to each monthly payment. Payment plans vary from three to 18 months, depending on the amount purchased, your creditworthiness, and your account history with Chase.
Citi Flex Pay
Citi Flex Pay allows you to take an eligible purchase with a Citi credit card and repay it over a set term with fixed payments and a fixed APR. This is part of Citi’s Flex Plan which also includes a Citi Flex Loan option which allows you to take out a loan against your card’s line of credit. Citi Flex Pay options vary depending on the purchase, your credit history with Citi, and the amount of the purchase. This makes Citi Flex Pay more opaque than some of the other credit card programs because there is a wide range of availability, prices, and terms.
Buy Now, Pay Later plans can be an effective way to ease the pain of a major purchase. But before you sign on the dotted line, be sure to look at the exact costs involved. Also make sure that you will be able to repay the loan on time to avoid interest charges and late fees.