What is a buy now, pay later program, and should you use it for holiday shopping?

Buy now, pay later programs allow you to get your item after an initial payment.

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• Buy now, pay later programs allow you to purchase items without paying for them all at once.
• When shopping online, you can usually get approved for BNPL within a few seconds at checkout.
• However, don't let BNPL entice you into spending money you don't really have.
• Read more of Personal Finance Insider's loan coverage here.

The holidays are upon us, and people are opening up their pocketbooks to pay for the festivities — consumers are estimated to spend nearly $1,000 this holiday season, according to recent data from the National Retail Federation.

If you don't have all of that money to spend upfront, an option to delay paying for gifts in full is becoming increasingly more prevalent with an arrangement called buy now, pay later. 

What is buy now, pay later?

Buy now, pay later (BNPL) allows you to buy items without paying for them all at once. Instead, you pay only a portion of the price upfront, spreading out the remaining cost over a predetermined number of installment payments. These payments are often interest-free, and the approval process is fairly fast for consumers. 

BNPL has become an exponentially more popular option for shoppers, particularly for those who do their buying online. Companies like Affirm, Afterpay, Klarna, and QuadPay all partner with various retailers to offer point-of-sale installment lending (another name for BNPL). 

Companies may limit the amount you can finance through BNPL, and not all purchases will be eligible for this plan.  

There are no one-size-fits-all rules for BNPL programs, as each company operates differently. However, this is generally what to expect with BNPL:

• Choose the BNPL option when checking out at a participating retailer and get an approval decision within seconds
• Put down a small upfront payment, for example, 20% of the overall purchase amount 
• Pay of the outstanding balance over a set number of weekly, bi-weekly, or monthly installments (which are usually interest-free)
• Choose whether to make automatic payments from your debit card, credit card, or bank account, or choose to pay via check

Pros and cons of buy now, pay later

Pros

• High credit score usually not required. You can often qualify for BNPL with a low credit score, unlike with a personal loan or a credit card. It could be a good option for borrowers whose credit history isn't in the best shape. 
• Often no interest charged. No-interest payments allow you to save money compared to other methods of borrowing like credit cards or personal loans. Keep in mind that this isn't guaranteed and that some lenders may not offer interest-free terms.
• Fast approval. You'll often be approved for BNPL within seconds at checkout. 
• Offered at many major retailers. You can find BNPL plans at many of the places you already shop, as a lot of BNPL companies have partnered with large retailers to offer these plans. They're sometimes available in stores, but they're more common online.

Cons

• Can lead you to spend beyond your means. If you can afford the item you want to buy and plan for how to pay for it, BNPL can be a great option. But don't let BNPL tempt you into spending money you don't really have — the allure of smaller installment payments could make an item seem more affordable than it is.
• Late fees. While some BNPL companies don't charge late fees, others may tag you with charges that are either a flat rate or a percentage of your purchase amount. 
• Late payments can hurt your credit. While BNPL programs generally don't report on-time payments, they often report late payments and any default on your payments. These can negatively impact your credit score.  
• Won't build your credit or earn you rewards. Many BNPL programs won't report your on-time payments to credit bureaus, so it won't matter for your credit score if you make consistent payments. Additionally, your payments won't qualify you for rewards like they may if you put them on a credit card.

What are alternatives to buy now, pay later?

Save up to make your purchase outright.

 If you're fortunate enough to have the time to wait to make your purchase, buying your item all at once will prevent you from adding to your total debt and remove the stress of keeping up with weekly or monthly payments. Set a target amount for your purchase and save a portion of your paycheck each month to reach your goal. 

Use a credit card to make your purchase.

If your desired purchase isn't available through BNPL or is more expensive than you can handle in monthly installments, you may want to use a credit card. However, keep in mind BNPL is usually easier to get approved for than traditional credit cards.

While both credit cards and BNPL allow you to delay payments on purchases, they operate differently. With BNPL, you'll repay your item on a fixed schedule, usually over several weeks or months, with minimal to low interest rates. Credit cards allow you to carry a balance indefinitely (though you'll have to make minimum monthly payments), but interest will accrue until you pay off your purchase.

Another option for a big purchase is to open a credit card with 0% APR. This interest rate is usually introductory, meaning it will last for a set amount of time after you open the card, but as long as you pay down the balance before that term expires, you won't be charged any interest. 

Take out a personal loan to make your purchase.

Personal loans work similarly to BNPL in that they are installment loans with a set payment schedule and a fixed interest rate. However, personal loans are generally used for larger purchases (the minimum on most personal loans is roughly $1,000), and they have longer repayment term lengths. Your credit score is a big factor when determining your personal loan terms, so you could pay a much higher interest rate on a personal loan than with BNPL if your credit isn't in good shape. 

The bottom line: While BNPL allows you to have a longer lead time on paying for items you want and may help make holiday costs more affordable, be careful before going into debt for nonessential purchases. 

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source https://www.businessinsider.com/personal-finance/what-is-buy-now-pay-later