Of late, many retailers have been offering ‘Buy Now, Pay Later’ or BNPL schemes to help people finance their purchases. Also known as a point-of-sale installment loan, these short-term plans are an effective way for companies to improve their sales by making products more affordable for their customers. These loans typically charge no interest and are fairly easy to get approval for. Here’s everything one needs to know about BNPL plans:

How does BNPL work?
All BNPL plans have different rules, terms, and conditions. However, most of them offer short-term loans with fixed payments without any interest or additional fees.

The payment amounts and due dates are shared upfront with the customers, making it easier for them to plan their budget. Every payment is worth the same amount. After approval, a small down payment (generally 25% of the total amount) is made, and the rest is paid in pre-set installments. These BNPL plans can be availed via special apps or one’s credit card at participating stores.

With these plans, the payments are automatically deducted from the source account using shared details (debit or credit card, or bank account number). Some lenders may also accept checks and credit transfers, but this is rare.

Unlike credit cards, most BNPL plans do not charge any interest on the balance carried over into the next payment cycle. Additionally, BNPL schemes do not set up an infinite credit line; they are only temporary arrangements for a single purchase.

BNPL and credit score
Typically, BNPL plans only perform a soft credit check, which does not affect one’s credit score. However, some companies may perform a hard check, which can cause the score to drop temporarily. Moreover, it is important to note that any late or missed payments will show up on one’s credit reports, resulting in drops. Also, BNPL plans do not help build a good credit history like other loans or credit cards.

Pros and cons of BNPL
Before signing up for any BNPL plans, one must take some time to understand the associated advantages and disadvantages. Here are some things to consider:

Pros
– These arrangements are perfect for people who want to purchase an item without making an upfront payment in full.

– These plans improve affordability by giving buyers instant access to credit. This helps customers break down their bills into several easy payment blocks without additional interest charges.

– Getting approval for BNPL plans is easy, even for those with a poor credit score.

– They do not contribute to one’s credit card debt, thus reducing excessive interest payments.

– BNPL plans have a quicker approval time than short-term loans.

– Many BNPL plans allow customers to choose repayment tenure, giving them more control and flexibility over the payment.

Cons
– If someone has multiple BNPL lines open at a time, it can be difficult to keep track of payments.

– Missing BNPL payments could result in late fees or charges and affect one’s credit score.

– Unlike credit cards, borrowers do not earn any cashback or rewards on their BNPL plans and payments.

– These payments will have to continue even if the product is returned, slowing the exchange cycle.

Risks associated with BNPL
Even the most appealing BNPL plans have certain risks associated with them. One must understand these when opting for this payment option.

Firstly, BNPL plans are not as closely regulated as credit cards and other payment options. As a result, there is a lot of difference between the terms and conditions offered by each lender. Some companies may require the payments to be made quickly (such as within the month, on a biweekly basis), while others may offer plans that extend up to a year.

Next, not understanding how these payments work could also lead to defaults. When signing up for a plan, one must take one’s budget into account to ensure that one can make the upcoming payments on time. Failing to do so could result in late fees and negatively affect credit reports.

Lastly, people must also know that a BNPL plan could affect their ability to return any purchases. Even after the merchant approves the return of the product, the buyer may not be able to cancel the BNPL plan until the proof of the return has been accepted and processed. This could unnecessarily block one’s money.

Alternatives to BNPL plans
Besides BNPL plans, buyers can also finance their purchases in other ways. Some popular options include:

1. Personal loans
This is a great option for those with a decent credit history, as it may help one receive a low monthly interest rate.

2. Credit cards
One of the easiest ways of making a purchase today is by putting it on a credit card. However, it is also easy to accumulate debt with this approach, which can be dangerous in the long term. Therefore, one must exercise caution when reaching out for the card and ensure that the payments can be made on time.

3. In-store financing
Some stores also offer their own financing options, which can be helpful for customers. However, these plans tend to have higher interest rates, so one must read the terms and conditions carefully before signing up for such plans.