Most people use installment loans or credit cards to make significant purchases, but an increasing number of consumers are using Buy Now, Pay Later (BNPL) financing. So, a growing number of retailers throughout the country are offering this payment option. But, how does Buy Now, Pay Later financing differ from a conventional installment loan?
How is a Buy Now, Pay Later Loan Different From an Installment Loan?
With Buy Now, Pay Later loans, shoppers apply for credit at the point of sale on a seller’s website or at a physical store’s check-out location. The customer uses the merchant’s mobile app or BNPL payment option to obtain instant financing. These loans can usually be paid back in installments, sometimes with low or no-interest charges.
You may think that that sounds like a BNPL is really just an installment loan after all. But, it isn’t quite the same thing. The sort of grab-n-go BNPL loan is often not consistent with consumers’ usual financial aims or lenders’ familiar processes and policies for conventional installment loans.
How Borrowers Use BNPLs Vs. Installment Loans
Many installment loan borrowers use the loan proceeds to help fund major purchases such as cars, furniture, appliances, business equipment, education expenses, medical bills, etc. Customers who take BNPL instant installment loans tend to spend their loan proceeds on retail purchases they finance at the point of sale, such as electronics, furniture, sporting goods, travel packages, etc.
That’s why BNPL borrowing has been called today’s generation’s layaway. Some of the most common reasons people say they’ve taken a BNPL loan are for convenience, more flexible payments, or an interest-free loan. Some borrowers may also not have access to other forms of credit.
On the upside, BPNLs offer consumers convenience and often zero-interest terms, which is very appealing to many people, but on the downside:
- Instant gratification encourages impulse spending: For people who are already having difficulty managing spending habits, BPNLs can worsen their situation.
- Late payments: If you can’t make the payments, your credit standing can be damaged, making it difficult to get other lines of credit like for a car or get a credit card.
- No flexibility on payment dates: Typically, BNPL lenders don’t permit borrowers to choose their payment dates, unlike installment lenders.
- Spending to buy things you can’t afford: Many consumers miss payments and end up doing without essentials in order to cover their BPNL loan payments.
Either a BNPL or installment loan can be helpful by stretching out the repayment period. But, they only make sense if borrowers are not impulsively overextending themselves by financing unplanned purchases. As mentioned, BNPLs can be especially enticing to shoppers who are inclined to make such spontaneous purchases. In response to that problem, at least one major national banking chain now provides installment loans targeting BPNL contracts, to help those borrowers regain their financial balance.
All Borrowing Requires Financial Discipline
A BNPL loan can help you make small payments for a purchase you have planned (budgeted) to make. But, beware of this instant borrowing if you have trouble controlling spending. Being able to get quick installment loans is not the same as taking a BNPL loan. Regular installment loans have interest charges and they’re accessed through a regular installment loan provider, which serves to encourage borrowers to plan their budget for payments. That approach can help people maintain greater discipline in their choices to make new loans.