During your Internet browsing, you may have noticed options to pay for purchases with installment plans such as Afterpay, Klarna, Affirm, and Sezzle. How do these sites work? And are they apps for savvy shopping or a financial pitfall in the making? Read on for everything you need to know about buy-now-pay-later (BNPL) software solutions.
How Buy-Now-Pay-Later Solutions Work
Historically, stores would offer layaway plans that allowed consumers to pay for items in installments. Buy-now-pay-later software solutions are the modern incarnation of this system. As a customer, you can download an app or select this solution at checkout when you’re shopping with select merchants. BNPL solutions are available with companies ranging from fashion retailers to home goods shops.
The purchased items will be shipped to you when you checkout, but you’ll pay for the item over several weeks with automated, interest-free payments. For example, with Afterpay, and most purchases, you’d pay 25% of cost upfront, then the same amount in three subsequent installments over six weeks.
To qualify to use these apps, you must be over 18 years old and have a credit or debit card to use. You also have to establish an account, which requires providing your phone number and an email address. New users have relatively low spending caps, usually of a few hundred dollars. These spending caps can be spread between retailers. The services often extend higher spending caps to users who establish reliable repayment histories.
Initially, BNPL solutions sound like a hassle-free way to pay for items you don’t have the lump sum to pay for today. It also seems like a great substitute for your credit card, which charges interest and sometimes fee for the ability to borrow credit and make payments. However, the transaction may not be so simple.
The Advantages of Buy Now, Pay Later Software
Here are a few of the benefits of using BNPL services:
- BNPL software decides nearly instantaneously whether you’re approved for the service, so you can know right away whether you can move forward with your purchase.
- BNPL apps don’t run credit check on customers. So, people with no credit or low credit scores can easily qualify to use these services unlike traditional forms of credit.
- While credit cards charge interest and most BNPL options don’t. That means you likely won’t end up spending more money on your item than it costs as often occurs with credit cards.
- Also unlike credit cards, you won’t suffer any consequences — like dinged credit scores or increased interest rates — for reaching your spending cap. At worst, you won’t be able to use the service again until you repay your balances.
- You won’t suffer a prepayment fee, as you might were you to take out a traditional loan to finance a purchase.
The Disadvantages of Buy Now, Pay Later Software
BNPL services have a few downsides.
- BNPL services are only available to use at select retailers, so they aren’t a universal payment solution.
- These services can lead to consumer confusion. These are third-party services that operate outside of the merchant. So, what happens if your item is lost or damaged during shipping? What happens if it isn’t the right size, color, or dimensions and you need to return it? Whose customer service do you seek out? Navigating these customer-service issues can turn a seemingly simple transaction into a hassle.
- These services can lead to budget busting. Having the option to repay the cost of an item could entice you to spend beyond your means.
- You might rationalize a payment plan by thinking that you’ll have more money later — after payday, perhaps. But unforeseen circumstances, such as being laid off, a natural disaster, a death in the family, or unplanned rising costs on essentials such as rent, could occur during that time. These situations could affect your ability to complete your payment plan on time.
- Similar to credit cards, you’ll rack up fees if you miss payments. These fees could lead you to spend far beyond the price of the item purchased and cause you to get even further behind on payments. You could avoid this drawback by adhering to scheduled automatic payments.
- BNPL services don’t check your credit, but they also don’t report your credit either. That means you won’t be accumulating credit history and/or demonstrating that you can reliably repay borrowed funds. In the long run, that credit history is valuable for making big purchases such as a home or a car.
We hope this information empowers you to make informed choices regarding buy-now-pay-later options.