This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.
Buy now, pay later plans can land you in debt, but they can also up your shopping game if you’re savvy. Find out how to get the most value from BNPL.
Image source: Getty Images
You’ve probably noticed buy now, pay later payment options popping up practically every time you make an online purchase. Buy now, pay later (BNPL) services like Affirm, Klarna, and Afterpay, let you split up a purchase into several installments. When you pay using BNPL, you’ll usually spread out the purchase price into four separate payments, the first of which is due at the time of the transaction.
When you pay with BNPL, you’re taking on debt. Shoppers should be aware that these services make most of their money from retailers who pay the fees because customers often overspend when they use BNPL. But if you understand the truth about BNPL services and exercise caution, this option can transform the way you shop. Here’s how.
1. You can avoid interest and late fees
Unless you have a 0% APR credit card (in which case, that 0% APR is always temporary), you’ll accrue interest on any balance you carry from month to month. If you’re carrying a balance between billing cycles, interest will start to accrue as soon as you buy something using a credit card.
One of the big appeals of buy now, pay later plans is that most don’t charge interest if you pay off the loan as agreed. Be aware, though, that many of these loans charge substantial annual percentage rates (APRs) plus fees if you’re late or miss a payment.
2. You can avoid a hard credit inquiry
When you apply for most credit cards or personal loans, you receive a hard inquiry on your credit reports, which can temporarily ding your scores by a few points. But applying for BNPL doesn’t typically result in a hard inquiry, which can be helpful if you’re trying to improve your credit and personal finances. Plus, even if you have healthy credit, there are times that you want to avoid opening a new line of credit or making a large purchase on a credit card — particularly if you’re applying for a mortgage.
3. You can avoid long-term debt
With credit cards, it’s often tempting not to pay off your balance in full each month because parting with your cash is painful. But when you use BNPL, you’ll only have about six weeks or so to pay it off. For some, that’s a downside, but it can be a positive if you’re looking to avoid long-term debt or you’re paying off credit cards and don’t want to add to the balance.
Just make sure you pay off the loan with your debit card instead of a credit card. Otherwise, you could wind up indirectly paying interest on BNPL purchases by way of your credit card’s interest rate.
4. You can take advantage of a good deal
Sometimes, a great deal doesn’t sync with your pay schedule. If there’s a deal you want to take advantage of, but you won’t get paid for a few days and you don’t want to pay with credit, BNPL could help you seize a bargain.
Be cautious here, though: Only use BNPL to land a deal if you’re buying things you actually need, like new tires, a laptop for school, or a replacement for the couch your dog destroyed. Good deals can be found every day, and using BNPL to chase too many of them could drive you into debt.
5. You can avoid higher-interest debt
It’s essential to look at the alternatives to BNPL, such as a 0% APR credit card or in-store financing. But if you’re facing a pressing need and you’re considering high-interest alternatives, like payday loans or a credit card cash advance, BNPL is usually the better option. Once you pay off your BNPL loan, aim to build at least a three-month emergency fund so you have cash on hand for future crunches.
How to avoid debt with BNPL
If you’re considering a BNPL loan, follow these tips to avoid borrowing more than you can afford:
Use BNPL for necessary purchases only. Save up for purchases you don’t need right away.Don’t take out more than one loan at a time. Because BNPL lenders usually don’t report to credit bureaus, borrowers can often get approved for more than they can afford to repay.Budget for each of your payments. If you think you’ll fall short on one of your payment due dates, consider whether you can cut an expense or earn quick cash with a side hustle or a few extra work shifts.
Finally, be sure you actually read the details of any payment plan before you agree to it. If there’s something you don’t understand or you’re not confident you can repay the loan, it’s a sign you should pass.
Alert: highest cash back card we’ve seen now has 0% intro APR until 2025
If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Robin Hartill, CFP® has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
