What is buy now, pay later? A guide for families navigating modern payment options
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Key takeaways:
- Buy now, pay later offers short-term financing for one-time purchases.
- BNPL providers usually don't charge any interest, but late payments may incur fees.
- Use BNPL wisely to avoid spending outside your budget.
You're scrolling through Amazon, looking for a new pair of running shoes for your track star teen. The problem: The best pairs are pricey. Like, well outside your allotted budget for extras. You pull out your credit card to check out, then notice another option—buy now, pay later.
What is buy now, pay later, or BNPL? It's a flexible payment method that lets you spread out an item's cost over several weeks. It's useful for those times when you're short on funds and don't want to use your credit or debit cards. But like any financing tool, you'll want to understand all the benefits and risks, so you can make an informed choice if you use it.
How buy now, pay later works in everyday shopping
What is BNPL? It's a form of installment financing that lets you buy items and pay for them over time. Usually, you pay a portion of the cost upfront, then make regular payments until you satisfy the balance.
BNPL companies don't charge interest on most purchases. However, you may owe fees for missed payments. Popular companies that offer BNPL include Klarna and Affirm, but there are several others. Most BNPL companies follow a two-month repayment schedule with payments due bi-weekly.
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BNPL is quite different from other short-term financing tools like credit cards. Most BNPL providers don't report your balance or payments to the credit bureaus. That's not the case for credit cards.
Let's take an example of BNPL so you can see how it works. Assume you buy a $500 plane ticket online. At checkout, you choose BNPL and get approved for financing. You owe $150 at checkout and pay the remaining $350 over eight weeks, with $87.50 due bi-weekly. You get what you want now, without incurring any interest.
Benefits of using buy now, pay later for families
As a budget-minded parent, BNPL can be beneficial when you're short on cash. For one, it allows you to buy expensive items and pay for them over time. That's very convenient when you need something right away and don't want to take out a loan to get it.
Another advantage is interest savings. Your credit card provider may charge 10% or more on purchases, but most BNPL companies don't charge interest. It's a cheaper way to finance items, especially if you don't anticipate any repayment problems.
BNPL payments are usually budget-friendly. Some providers offer flexible repayment options, so you can schedule them based on your paycheck frequency or financial commitments.
Potential pitfalls and risks to watch out for
BNPL sounds pretty good so far, but it's not without drawbacks. One problem that some people run into is missed payments. Failing to pay the provider according to your payment schedule usually results in a fee. The fee offsets any interest savings and makes BNPL more expensive than using a credit card.
Most BNPL companies don't report outstanding loans to the credit bureaus. However, some share missed payment details. If you fall behind with a BNPL loan, it can hurt your credit score and make it difficult to get future financing.
Another risk is overspending. Using buy now, pay later sometimes comes in handy. But if you're relying on it frequently, it may be time to take a closer look at your budget. There may be opportunities to reduce expenses so you can stick with your spending plan.
Comparing buy now, pay later to traditional credit options
As a relatively new tool, BNPL is quite different from traditional loans. Paying for something with buy now, pay later usually doesn't involve a formal credit application. The only things most companies ask for are your contact and bank account details.
That's different from credit cards that require a hard credit inquiry during the approval process. A hard inquiry can impact your credit score, even if you don't end up with a loan.
Once you take out a credit card and use it, you'll make monthly payments until you pay off the debt. Lenders tack on interest to the purchase, so your total cost may be significantly more than the original item's price. With a BNPL purchase, you usually don't have to worry about interest.
BNPL tools aren't very effective for building credit since they don't report your on-time repayments to the credit bureaus. If that's a goal of yours, you may want to consider other traditional financing options that communicate with Experian, Equifax, and TransUnion.
In addition, educating your kids or teens about buy now, pay later is a smart move. Explaining its benefits and risks can prepare them for early adulthood, when they'll make their own choices on managing money. Tools like Greenlight, the #1 family finance and safety app, have financial literacy lessons and games that teach kids how to spend responsibly.
Tips for families and teens using buy now, pay later responsibly
Buy now, pay later can be a real lifesaver when you need something immediately. Use it thoughtfully, and set spending limits to keep it from becoming a financial crutch. For example, you might ask yourself these two questions before using BNPL:
Is this a must-have item that can't wait?
Can I reasonably pay this back in two months without affecting the family budget?
If you answer no to either question, then BNPL might not be a good fit. Consider another solution, like saving toward the purchase or finding a cheaper alternative.
Use BNPL as an educational opportunity for teens. Knowing how it works and how to use it safely can help young adults avoid taking on debt they have difficulty repaying. Here's a tip: Use the Greenlight app to help your kids build money habits in childhood, so they grow into financially confident young adults.
Make smart payment choices for your family's financial health
BNPL can be super helpful when you're in a cash flow crunch. Knowing its risks can keep you from overspending and taking on unnecessary debt. At Greenlight, we're all about helping you spend wisely. Use our financial literacy app to teach your kids and teens the ins and outs of money. It includes educational content that the whole family can enjoy. Whether you want to learn for yourself or teach your kids how to save, budget, spend, or earn, we've got you covered!
Teach smart budgeting early. Set spending controls and savings goals, and teach kids how to manage money with Greenlight. Try Greenlight, one month, risk-free.
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