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When you hit the checkout counter, you may have the option to pay with a credit card, debit card, or buy now, pay later (BNPL). If you’ve never used a BNPL service, you might have some skepticism about how these consumer loans work and whether the terms are favorable compared with other financing options like a traditional credit card.
Recent studies suggest that many consumers have hopped on the BNPL bandwagon.
According to a report by the Consumer Financial Protection Bureau (CFPB), between 2019 and 2021, the number of BNPL loans originated in the U.S. by the top five lenders grew by 970%.
But which payment method should you use, and when does it make more sense to use a credit card versus BNPL?
BNPL, or buy-now, pay-later, platforms make it easier for consumers to finance purchases over time by breaking the overall cost into smaller installments. The terms of these installments vary by platform but typically can range anywhere from a few weeks to a year or longer.
The catch: These installment loans often come with interest and fees. The service may base this off of your credit profile, although some services have a flat rate for fees and APRs.
Merchants will typically partner with one or multiple BNPL services and offer it as a payment option at checkout. Consumers will be redirected to the given platform’s website and learn more about their financing options after filling out key information about themselves and their credit history. In many cases, the platform will use this information to perform a soft credit check (which doesn’t impact your credit score) to determine whether to approve you for a line of credit and determine your credit limit, APR, and more.
“Many merchants will offer customers a choice of payment options. There are various factors that a consumer may consider when choosing between a credit card and BNPL, including the item being purchased, the consumer’s desired repayment period, and the consumer’s credit history,” says Florin Arghirescu, chief product officer at Synchrony, a consumer financial services company.
BNPL services differ from traditional credit cards in a few key ways.
If you’re unsure whether to use BNPL or a credit card to finance your purchase, there are a few key questions you may want to ask yourself to determine the appropriate payment method.
Ideally, having the cash on hand or in your checking account to cover a purchase would save you the headache of repaying an installment loan. In some instances, spreading out a purchase over time with a credit card or BNPL makes the most sense. It can make it easier to afford the things you want, without putting a massive dent in your monthly budget.
Relying on a BNPL service comes with its own risks in the form of fees and high-interest rates. Before you use BNPL as a payment method, consider the potential downsides and weigh whether or not an alternative payment option makes more sense for you.
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