With today’s rapidly changing economics, prices climb higher as we speak, and more and more individuals are turning to consumer finance solutions to afford their purchasing needs while deferring payment through installment methods. People are leaning mainly towards two central payment methods: Buy Now Pay Later (BNPL) services and traditional credit cards. Each payment method offers its own set of benefits and considerations but also comes with a set of challenges. This raises the question of which option is the best for you. And how to choose the one that aligns with your financial goals?
What Is BNPL?
A buy now pay later method is a consumer financing approach that allows consumers to postpone their payment and split it into a certain number of installments or smaller payments according to the consumer’s best convenience. Some BNPL methods are limited with a very specific duration of time and limited installment options, while others can extend their settlement duration to years.
The Differences Between Credit Cards and BNPL
The line between the two is actually starting to fade, as both offer very similar services and with many BNPLs offering users virtual or physical cards, both methods are getting closer to each other, yet, there are some differentiations we can highlight.
Interests and Fees
Credit Cards:
Credit cards may entail various fees such as annual fees, late payment fees, and usage-based fees. Moreover, credit cards often have high interest rates. While there’s typically a grace period during which no interest accrues if you repay the bill in full, revolving debt incurs daily interest charges. Additionally, interest on purchases begins accumulating with time.
BNPL:
BNPL services generally do not impose fees, except for potential late payment charges. “Pay in four” plans typically do not incur interest charges, as BNPL providers generate revenue from merchants. However, alternative BNPL plans, like monthly payment schemes, may involve interest charges.
Requiring a Current Bank Account
Credit Cards:
Credit cards are known for their long acquisition process; before utilizing a credit card, you must undergo an application process, which varies depending on the bank and card type. The approval decision of your credit card can be affected by factors like your credit score, income, monthly expenses, etc. Once approved, a credit card allows you to make purchases up to your credit limit, which you can then pay down to reuse.
BNPL:
The process for accessing a Buy Now Pay Later (BNPL) service is different. You can apply for BNPL either at checkout for a specific purchase or by opening an account beforehand. Unlike credit cards, BNPL often does not require a credit check or an existing bank account, which makes it accessible to individuals with limited or lacking credit scores. However, approval for BNPL purchases may vary based on factors like previous usage with the provider, purchase amount, item type, and store preferences. Some BNPL providers offer virtual or physical cards that can be used at any store that accepts associated mobile wallets or card networks.
Payment Approach
Credit Cards:
Credit cards operate on a revolving credit model, allowing you to pay a portion of your balance while carrying over the remainder to the following month. A minimum payment is typically required, often calculated as a percentage of your total balance with a minimum floor. Your credit card statement should summarize the time it would take to pay off the balance you’ve consumed.
BNPL:
BNPL services typically divide the purchase amount into four equal installments. The initial quarter is paid at the time of purchase, followed by three equal payments every equal period of time, like two weeks or a month. Some BNPL providers offer extended payment plans as well.
Finally, it’s safe to say that no option is completely better or more suitable for everyone. So, the biggest factor to consider is your financial needs. Are you looking for a long-term installment plan with all it takes from fees and interest, or are you willing to split your payment into four payments, avoiding unnecessary fees and high interest rates?