Say you want to buy a new couch for your housewarming party, but you don’t have enough money in the bank. To avoid high-interest credit card debt, you might consider a buy-now-pay-later (BNPL) service or a personal loan to fund your purchase. But which option is best?
The popularity of BNPL services has been on the rise, but there may be some risks to consider before using this service. To help you make an informed decision, we’ll explain the key differences between a BNPL service and a personal loan, and the pros and cons of each.
What Are Buy Now Pay Later Services?
A buy now pay later service is a form of short-term financing that allows you to make a purchase immediately and then pay it back in installments over time. There are two main types of BNPL plans:
- Equal Payment Plans: In this plan, you make regular installment payments until the balance is paid in full. Buy now pay later services offer a range of installment options that have to be paid back over a few weeks or months.
- Deferred Payment Plans: With this option, you agree to pay your balance by a defined due date. There are no installment payments, and you’re responsible for managing your payments.
You can often use BNPL services when you’re cashing out online and in some retail stores. Select credit card issuers also offer credit card installment payments, which are also referred to as “equal installment payments.”
What Can You Buy Using BNPL Services?
Buy now pay later services can be used to purchase a broad range of products and services, including:
- Clothing
- Household items
- Entertainment
- Travel
What Are Personal Loans?
Personal loans are frequently used to fund costly expenses, like home renovations or car repairs. They may also be used to consolidate debt.
With a personal loan, you can borrow a fixed amount of money and pay it back over time. It’s your responsibility to repay the loan in installments, including interest and applicable fees. Most personal loan amounts range from $100 to $50,000 and offer terms from 6 to 60 months.
You can get a personal loan from a bank, credit union, or other financial institutions.
Buy-Now-Pay-Later Vs Personal Loans: Key Differences
When trying to decide whether a BNPL service or a personal loan is the right choice for you, consider some key differences:
| BNPL | Personal Loans | |
| Approval Process | Doesn’t always require a hard credit check. | Hard credit check and income verification required. |
| Interest Rates & Fees | – Some BNPLs advertise no fees or interest if you make your payments on time and pay your balance by the due date. – If you miss a payment, you may have to pay interest or fees. – Some companies might also charge a fee to set up the plan. | Comes with fees and interest payments that vary based on your credit score. |
| Loan Terms | Most BNPLs offer a few weeks or months to repay your purchase. | Terms can range from 6 to 60 months. |
| Credit Impact | Most BNPL providers skip credit checks, so your credit score is usually unaffected. But if you apply for a larger amount or extended installment plan, the lender may perform a hard inquiry, which can appear on your credit report. | – On-time payments can improve your credit score. – Failing to make your loan payment can negatively impact your credit score. |
| Borrowing Limits | Borrowing limits vary between providers, but are generally smaller than personal loans. | Borrowing limits can range from $100 to $50,000. |
When Are BNPLs A Good Idea?
There are some cases where BNPLs make sense. Some examples include:
- Small Purchases: A BNPL might make it easier to budget for a small purchase by splitting up the payments over time.
- One-Time Purchase: Say you need to buy a laptop for school, but you don’t have enough money in your account. A BNPL service can help you stay on budget by splitting up your payments. Just make sure you have a clear repayment plan to avoid fees or interest.
- Promotional No-Interest Offers: If you qualify for a BNPL service that offers a 0% promotional rate, a BNPL service can offer a cheaper way to borrow than a credit card.
When Are BNPLs Not A Good Option?
Be sure to consider the following potential drawbacks of a Buy Now Pay Later service:
- They Advertise No Late Payment Fees Heavily: While many BNPL services promote no fees, there are repercussions if you miss a payment. If you stop making payments, it may be reported to the credit bureaus, which can damage your credit score. If you’ve missed payments for months, your loan can be charged off and transferred to a collection agency.
- BNPL Features Can Be Hard To Understand: Some BNPL borrowers struggle to understand how a BNPL service can impact their credit score and why they were charged a fee or interest payment when they missed a payment. Trying to resolve a dispute with a BNPL service was also listed as being hard to understand in a study by the Financial Consumer Agency of Canada.
- Risks Of Over-Borrowing And Over-Indebtedness: Since BNPL services help you break up your payments over time, you might not realize how much your purchases can accumulate over time. This can lead to problems with budgeting, causing you to delay other bill payments or requiring an additional loan to make a repayment.
When Personal Loans May Be The Smarter Choice
There are several reasons that a personal loan might be a better option than a BNPL service, but it depends on your circumstances.
- Better For Managing Larger Expenses: In general, a personal loan gives you access to a larger sum of money than a BNPL service.
- More Flexible: When you’re approved for a personal loan, you can spend the money just about any way you like. With a BNPL service, on the other hand, the loan is directly tied to a specific purchase.
- More Regulations: Personal loans offer more regulations and consumer protections than BNPLs.
- Opportunity To Consolidate Debt: You can use a personal loan to consolidate debts with a higher interest rate.
- Helps Build Credit Over Time: With on-time payments, you can use a personal loan to build your credit score.
Learn more: Pros And Cons Of A Personal Loan
When Personal Loans Should Be Reconsidered
Consider the following potential downsides of a personal loan before applying:
- Requires A Credit Check: Most BNPL services do not require a credit check for standard short-term installment plans, making them accessible even to users with limited or poor credit history.
- Approval Process May Take Longer: The approval process of a personal loan can take upwards of several days, depending on the lender and your financial profile.
- Interest Rates Vary Based On Creditworthiness: If you have poor or limited credit history, you could face higher rates or be denied a loan altogether. Lenders use your creditworthiness to gauge risk, so improving your score before applying can lead to significant savings over the life of the loan.
Bottom Line
Now that you know the key differences and pros and cons of a BNPL service and a personal loan, you can decide which option best aligns with your financial needs. A BNPL service can be a smart tool for short-term, interest-free financing, especially if it helps you manage your cash flow or avoid more expensive options like a payday loan. But for larger expenses or long-term borrowing, a personal loan typically provides more stability, clearer repayment terms, and stronger consumer protections.
