What is Buy Now, Pay Later (BNPL)?

Buy Now, Pay Later (BNPL) lets people buy things today and pay for them over time in installments. It shares similarities with more traditional loans, credit cards and layaways. But there are important differences.

What you’ll learn:

• BNPL is typically a short-term financing option that lets you make purchases and pay for them in installments.

• BNPL plans might offer quick approval and low- or no-interest payment plans. But watch out for fees and lack of consumer protections.

• When lenders report loans and payment activity, the information could show up in credit reports.

• Credit-scoring companies, including FICO®, are incorporating BNPL loans into credit-scoring calculations.

BNPL is just what it sounds like: a payment option that allows borrowers to divide purchases into smaller payments over time. Loans are often interest free, according to the Consumer Financial Protection Bureau (CFPB). But the agency also says most BNPL lenders charge late fees.

The cost is spread over several installments, typically in fixed amounts once a month or twice a week until the balance is paid in full. For example, you might be able to buy a pair of shoes costing $100 by paying $25 each month for four months.

Affirm, Afterpay and Klarna are all examples of BNPL lenders. BNPL plans aren’t all exactly alike. But if you decide to use this payment method, the steps generally work like this:

• Select BNPL. Choose a BNPL payment option at checkout, if it’s available. 

• Apply. The CFPB says you need to provide personal information, including your name, email address, phone number and date of birth. You also must have a debit card, credit card or bank account for payments. 

• Wait. BNPL providers generally don’t conduct a hard credit inquiry when you apply, but they may perform a soft credit check. Approval can take anywhere from a few seconds to a few minutes. And if you’re approved, you can complete your purchase.

• Pay. The cost of your purchase is typically divided into installments. The first installment might be due when you check out. Remaining payments are then usually automatically deducted from your credit card, checking account or savings account.

Most BNPL loans don’t come with interest or finance charges, such as origination fees. But there may be fees for missed or returned payments, among others. So it’s a good idea to read each loan’s fine print before you apply. You can also set up automatic payments from your credit card to make sure your bills are paid on time. 

You might also want to consider the protections the BNPL provider offers. For instance, do they have dispute resolution and fraud protection services? According to the CFPB, “Borrowers seeking Buy Now, Pay Later credit may encounter products that do not offer protections that are standard elsewhere in the consumer financial marketplace.”

In the past, BNPL lenders didn’t report to any of the three major credit bureaus: Experian®, TransUnion® and Equifax®. But that’s started to change. For example, Affirm now reports payment plans and activity—including on-time, late and missed payments—to Experian and TransUnion.

If you use CreditWise from Capital One to monitor your credit scores, you might see your BNPL loans in credit reports and CreditWise alerts. That’s because CreditWise gives you access to your TransUnion credit report, which includes BNPL data in consumer credit reports whenever it’s reported.

Generally, anything that’s in your credit report could be included in the calculation of your credit scores. 

Not all credit-scoring models have fully integrated information about BNPL loans into their calculations. But that’s starting to change with FICO.

Another way that BNPL credit could affect your credit scores is if you don’t repay the loan and it’s turned over to a debt collection agency. If a collections account shows up in your credit report, it could stay there for seven years and negatively affect your credit scores.

Having BNPL loans could affect credit scores. But there’s more to consider about how to use BNPL loans responsibly. 

Some lenders may allow you to pay for your purchase with a credit card, but that could mean paying off one form of debt with another.

If you use your bank account to make BNPL payments and don’t have enough funds to cover a payment, your bank may charge you an overdraft fee. That’s sometimes referred to as a nonsufficient funds (NSF) fee.

BNPL is a short-term payment option that lets people repay purchases over installments. Because it’s relatively new, there are things about its role and impact that are still unclear and evolving. And that includes when and how it might affect consumers’ credit.

You can keep an eye on your credit scores with CreditWise. And if you think a credit card might better suit your needs, you can compare Capital One credit cards to find the right fit for your goals and financial situation.

If you’re new to credit or searching for your next credit card, Capital One can help:

• See whether you’re pre-approved for credit cards without harming your credit scores. 

• If you’re looking to build your credit with responsible use, explore cards for people with fair credit. 

• Earn unlimited 1.5% cash back on every purchase, every day, with a cash back rewards card. 

• Monitor your credit report and score with CreditWise. It’s free for everyone, and using it won’t hurt your credit.