BNPL meaning and how does it work

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These days, there are a lot of ways to buy things beyond using cash or credit cards. Some of these are tempting because they’re easy, potentially inexpensive, and accepted by more and more merchants. But it’s important to use them just as wisely as you use credit cards because they can affect your credit.

BNPL Meaning

BNPL means buy now, pay later. It lets you set up a quick, short-term payment plan at the point of sale. Usually, these are divided into about 4 monthly payments, though oftentimes the number of payments can be a lot more. BNPL can come with no interest charges, making this an attractive option for shoppers and an alternative to putting purchases on credit.

The majority of BNPL arrangements use third-party apps, though some retailers have their own in-house BNPL systems. Some of the most popular BNPL apps include:

  • Affirm
  • Sezzle
  • Afterpay
  • Klarna
  • Zip

These services vary in their terms and the merchants who accept them for payment, but major retailers including Amazon, Wal-Mart, Target, and many more participate in BNPL.

The Current Landscape of BNPL

As this article was being written in July 2022, the BNPL world had some shakeups. Two of the services we listed above, Zip and Sezzle, had been planning a merger over the last six months, but those plans were suddenly canceled. This caused the market to reevaluate the entire BNPL concept, and other companies saw a sharp drop in their firms’ values. Klarna’s value dropped by 85%. However, even with these circumstances, large players are moving into the BNPL realm. Block, the company formerly known as Square, acquired Afterpay and is working to incorporate it into its “Cash App”. PayPal has its own BNPL service, “Pay in 4”, and Apple is adding BNPL feature to its Apple Pay service.

What this means is that Buy Now, Pay Later services will continue to evolve, and likely stick around.

BNPL vs. Credit Cards

There are similarities between credit cards and buy now, pay later options like Affirm and Afterpay, but there are some key differences:

  • Credit card applications require a credit check, while BNPL is often approved right away
  • Credit cards carry interest charges, BNPL typically carry no interest fees
  • Credit card debt may be carried for a very long time by making only minimum payments, while BNPL must be paid off in the short term
  • Credit card balances are revolving credit accounts, while BNPL is more like a short-term loan
  • Credit cards offer bonuses like reward points, cash back, etc., but BNPL does not
  • Credit cards report your positive payment history, building a stronger credit score, while buy now, pay later loans typically do not produce positive credit reporting

How does buy now, pay later work?

From the comparison to credit cards, Buy Now, Pay Later deals sound like a pretty good idea for consumers. The “pros” of BNPL are obvious:

  • No hard credit check
  • Instant approval
  • No interest fees
  • Repayment is clear, with fixed, predictable amounts

But, there some significant “cons” to these services as well:

  • No positive credit reporting
  • No perks or benefits
  • Returning purchases can be much more difficult
  • BNPL loans are not subject to the Truth in Lending Act
  • Consumers can be tempted to rack up more debt and overspend, affecting their ability to pay rent, car payments, or other financial obligations
  • Shoppers can be led to purchase more than they intended

That last point is true of both credit cards and BNPL, of course, but with credit cards, the consequences are spread out indefinitely. If you get in too deep, you’re stuck with interest charges and repayment over the long term, but you can cut up your cards, go on a budget, get credit counseling, etc.

With BNPL, you’re expected to pay off those purchases right away, but if you go overboard, you don’t have the flexibility credit cards offer; if you don’t make the payments on time most BNPL will charge late fees. Also, while BNPL services don’t contribute positively to your credit history, you do see negative reporting if you can’t repay on time.

Budgeting is even more vital for people using alternate payment methods like BNPL. As a recent study from J.D. Power suggests, younger buyers are more likely to use these payment services, and they use multiple BNPL services at the same time. It’s easier for them to overspend because the different apps they use to buy are separate and they don’t realize how much they have to pay each month to cover all of their purchases. It’s a bit like having a lot of different credit cards, but without the small minimum monthly payments that credit cards offer.

Creditor-Offered BNPL

While most BNPL services are a Financial Technology product, some traditional creditors offer a version of BNPL to their borrowers. Some of the largest include American Express’ “Plan It”, Chase’s “My Chase Plan”, Barclays’ “Easy Pay”, and “ExtendPay” from US Bank.

In this scheme, the specific purchase being made is amortized over 4 months, and that amount is added to the minimum monthly payment required to the credit card balance.

This can impact our work at credit.org, as the minimum monthly payment is artificially increased, and the presence of this kind of card issuer-offered BNPL can impact the borrower’s eligibility for a Debt Management Plan (DMP).

Regulatory Oversight

Why is the standard repayment scheme for Buy Now, Pay Later purchases four payments?

Under the law, any loan repaid in more than four payments is subject to the Truth in Lending Act. As long as they keep the repayment schedule to four or fewer payments, BNPL lenders have much less regulatory oversight to comply with. This makes it much less expensive for them to operate and is a major way they can offer these kinds of loans without charging interest fees from the borrower. But that does mean consumers may not have all of the legal protections they’d have when using traditional loans or credit cards. BNPL services can avoid disclosures and in fact claim they aren’t lenders at all, but rather providers of “installment payment services.”

The CFPB (Consumer Financial Protection Bureau) seems to disagree with that description, and is actively working to analyze the BNPL industry. They say they’re gathering “information on the risks and benefits of these fast-growing loans.”

Likewise, the credit bureaus have started working this year to add information about BNPL loans to borrowers’ credit reports, and Equifax is going to incorporate BNPL borrowing into their credit scoring model.

What Happens if You Don’t Pay Back a BNPL Loan?

It’s hard to say what the full landscape of BNPL collections will look like. Some providers charge fees, others don’t. Some major players are just now joining the space, like Apple, who say they won’t charge fees or report missed payments to borrowers’ credit reports.

So, what will they do if the borrower doesn’t pay? Will they charge the debt owed to the credit card the borrower has on file with Apple Pay? Will they add the balance to an Apple Card? Will they sell the debt to a collection agency?

That seems to be the way other BNPL providers collect. Traditional methods like negative credit reporting, penalty fees and debt collectors are common, and the CFPB warns consumers about that outcome for late payments toward BNPL loans.

The bottom line right now is that BNPL services should be handled with great care by borrowers. These are loans, and like credit cards or any other consumer debt, they can be dangerous if they get out of hand, and multiple BNPL loans can cause a debt spiral. In fact, people who use a lot of different BNPL services should work especially hard to stay on budget and make sure they don’t overspend.

To learn more about budgeting, check out our Power of Paycheck Planning course, available for free in our FIT Academy, along with our Creating a Budget 101 and Budget 911 courses.

Speak to our certified Financial Coaches to review all of your options and discuss best strategies for getting out of debt.Speak to our certified Financial Coaches to review all of your options and discuss best strategies for getting out of debt.

About The Author

Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.