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You’ve probably noticed that when you shop online, or sometimes in a retail store, you can choose the buy now, pay later (BNPL) option. This is a type of installment loan that typically allows consumers to purchase something over the counter. Make little or no initial payment and pay off the balance in multiple payments at the point of purchase.
According to the Consumer Financial Protection Bureau, one common repayment plan allows you to pay for your items in four biweekly installments, interest-free, with the first payment made at checkout or two weeks later. .
How does the BNPL service work?
“Buy now, pay later” is, as the name suggests, a type of installment loan. Providers include Affirm, Afterpay, and Klarna.
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“A common feature is four interest-free payments over a six-week period, but in some cases these plans pay interest or not for longer periods of time (for example, six months, 12 months, or even (24 months or more),” said Ted Rothman, senior industry analyst. bankrate.com. “The main difference between buy now, pay later and buy later credit cards is that buy now, pay later plans are divided into predetermined installments. I know exactly how much money I have to pay and for exactly how long.”
Does BNPL require a rigorous investigation into a person’s credit history?
Rothman said BNPL lenders typically only do soft checks, so they don’t affect a consumer’s credit score. These plans tend to be easier to qualify for than credit cards or other loans or lines of credit, he said.
How can BNPL affect your credit?
Rothman said the credit scoring industry doesn’t really know what to do with BNPL.
“This is a newer form of financing that doesn’t fit neatly into traditional ways of doing things,” he said.
“Buy now, pay later” is, as the name suggests, a type of installment loan. Providers include Affirm, Afterpay, and Klarna. (St. Petersburg)
Given these challenges, along with the difficulty in obtaining BNPL information from providers, most BNPL plans to date do not appear on consumers’ credit reports, Rothman said. However, there are some new developments on this front.
“While Apple Pay Later has started reporting to Experian and Affirm is reporting some long-term plans to Experian, most BNPL plans are not recorded on Americans’ credit reports,” Rothman said. he said.
One exception, he said, is when a user is delayed for too long (often 90 days or more) and is sent to collections.
“Even though these BNPL plans don’t always report day-to-day payment activity, collection agency reports can be a significant blemish on your credit scoring,” Rothman added. Ta.
What do credit bureaus like Experian track?
Rod Griffin, Experian’s senior director of consumer education and advocacy, told FOX Business that once a BNPL loan is reported to Experian, it will appear on a consumer’s credit report like any other loan. , said it includes buy now, pay later. designation.
“The credit report includes the original balance, monthly payments, and terms of the BNPL loan,” Griffin said.
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Additionally, Griffin noted that currently, when BNPL information is reported to Experian, it will be included in a consumer’s Experian credit report, but BNPL data will not be incorporated into existing traditional credit scores. , said it may be incorporated as a new credit scoring model in the future. It is being developed.
Can BNPL services help you build credit?
Griffin said the future of BNPL and how it intersects with your creditworthiness could expand.
A typical repayment plan splits the price of your product into four interest-free biweekly payments, with the first payment due at checkout or two weeks later. (Robert Nickelsburg/Getty Images/Getty Images)
“As BNPL information is widely reported to Experian, lenders will have greater visibility into BNPL history,” Griffin said. “If you use your BNPL loan responsibly, don’t take on more debt than you can manage, and make all your payments on time, your BNPL payment history will open you up to new or other forms of credit in the future.” You may qualify.”
What are the potential downsides to BNPL practices?
Overspending could be a concern, experts warn. “With BNPL, I think it’s easy to trick yourself into overdoing it because you might not even feel like you’re in debt,” Rothman says. “This isn’t a $200 purchase for him, right? He only pays $50 four times. You could think of it that way.”
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For that matter, such plans are often embedded on retailer websites, which can encourage impulse purchases.
“Especially if you’re running multiple plans at the same time, you can end up spending more than you intended, and it’s easy to lose track of your frequent payment schedule,” says Rothman.
