Buy Now, Pay Later vs. Credit Cards

Buy now, pay later (BNPL) represents a growing payment trend among shoppers. Point-of-sale (POS) installment loans like these allow consumers to make purchases online or in stores and pay for them in a number of installments, often interest-free. As many as 60% of consumers have used buy now, pay later services the past, and 46% were making at least one payment through a BNPL agreement as of April 2021. Here’s how buy now, pay later compares to paying with a credit card.

What Is Buy Now, Pay Later?

Buy now, pay later is a type of short-term financing. BNPL plans often charge no interest and no fees, with the exception of late fees for missed payments. These point-of-sale installment loans are offered by a number of companies, including:

BNPL can be used at a variety of major retailers, which differ from plan to plan. Some credit card companies, including American Express, also offer installment payment arrangements for eligible cardholders. Each buy now, pay later plan is unique to its provider, but they generally have a few things in common.

For example, BNPL loans typically require an upfront deposit payment representing a portion, such as 25% of the purchase amount. After that, the remaining balance must be paid off in installments over a period of a few weeks or a few months. Some BNPL services set the total number of payments at four, while others allow borrowers to select their own payment schedule.

Just over half of Americans (51%) used a buy now, pay later service at least once in 2020 or 2021, during the pandemic. Among the most commonly purchased items were clothing, furniture, appliances, electronics, housewares, and cosmetics.

How Credit Cards Differ

Like buy now, pay later loans, credit cards can be used at retailers. But they can also be used to buy gasoline, make utility bill payments, and accommodate other kinds of expenses. If the cardholder pays their balance in full each month, they won’t owe any interest. Otherwise, their balance will accrue interest at the card’s annual percentage rate (APR).

Credit cards may also charge fees, including:

A credit card is an example of revolving credit. With this type of credit agreement, you have a set credit limit against which you can borrow. As you make purchases with a credit card, your available credit is reduced by that amount. When you make a payment, that frees up your available credit.

Buy Now, Pay Later vs. Credit Cards: Which Is Better?

Buy now, pay later plans and credit cards are both options to consider when making purchases online or in stores. But each has some advantages and disadvantages.

Pros of Buy Now, Pay Later

• Convenience: You can apply online and be approved almost instantly
• Get approved without a hard credit check, which can lower your credit score
• Pay off purchases in installments, typically with no interest charges
• Choose a payment frequency that fits your budget (at some BNPL providers)

Cons of Buy Now, Pay Later

• Because you don’t have to pay in full right away, it’s easy to overspend
• Payment plans aren’t always interest-free
• Missing a payment or being late with one could hurt your credit score
• Not all retailers accept buy now, pay later

Credit card pros

• Can be used at a wider array of retailers and for other purposes
• Pay off purchases over time at your own pace, without fixed installment payments
• Potential to earn cash back, miles, or points on purchases
• Cards may offer other perks, such as travel and rental car insurance

Cons of Credit Cards

• Interest charges can add up quickly if you carry a balance from month to month
• A hard credit check is typically required to qualify
• Late payments can be damaging to your credit score
• Credit cards can charge numerous fees, which add to your overall cost

How to Choose a Buy Now, Pay Later Plan

When comparing buy now, pay later plans, pay particular attention to:

• which retailers accept it
• initial deposit requirements
• number of installment payments required
• interest charges, if any
• fees, if any
• limitations or exclusions on purchases
• credit check requirements
• shipping policies
• refund and return policies

Also, consider how a buy now, pay later agreement might affect your credit. Though many BNPL companies only perform a soft credit check to approve shoppers for loans, your credit score could still suffer if you’re late in making a payment and the company reports it to a credit bureau.

The Bottom Line

Buy now, pay later plans can make it easier to buy things online or in stores and pay them off relatively quickly, often without incurring interest charges. These point-of-sale installment loans may be especially appropriate for people who’ve had trouble getting approved for a traditional credit card, either due to a low credit score or an insufficient credit history.

Like credit cards, BNPL loans have to be repaid on a timely basis to avoid potential credit score damage. And it’s still helpful to have at least one credit card to use in situations where buy now, pay later doesn’t apply. For instance, you may need a credit card to book flights or rent a car. Finally, if credit card rewards programs are appealing to you, you may want to check out Investopedia’s regularly updated list of the best rewards credit cards.