What is Buy Now, Pay Later (BNPL)?

Done any shopping lately? If you have, you’ve probably seen a different way to pay at checkout. Buy Now, Pay Later (BNPL) lets you buy things today and pay for them over time in installments. It shares some similarities with loans, credit cards and layaways. But there are also 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 insufficient consumer protections.

• When lenders report it, BNPL could show up in credit reports.

• BNPL doesn’t currently factor into credit-scoring calculations. But that’s widely expected to change.

BNPL is just what it sounds like: a payment option that allows you to divide purchases into smaller payments over time.

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.

BNPL providers you might have seen or heard of include Affirm, Afterpay and Klarna.

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. BNPL providers generally don’t conduct a hard credit inquiry when you apply. But you have to prove your age and identity and have a mobile phone number and a debit card, credit card or bank account.

• Wait. 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 at checkout or later. 

• Look out for other charges. Most BNPL loans don’t come with interest or finance charges like 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. 

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

For now, any BNPL information in your credit reports is only visible to you. Lenders won’t be able to see it. That might change in the future, though.

It’s also quite possible that you won’t see your BNPL transactions in your credit report. That’s because BNPL lenders don’t have to report to credit bureaus, including Experian®, TransUnion® and Equifax®. Some lenders report, and some don’t. Some lenders report some transactions but not all. And some report to one credit bureau but not others.

Generally, anything that’s in your credit report could be included in the calculation of your credit scores. But currently, that doesn’t apply to BNPL loans.

BNPL works differently from other types of credit. And existing credit-scoring models aren’t designed to take these differences into account. But TransUnion, among others, has said that it expects BNPL to be used in credit scoring as the industry evolves.

One way that BNPL credit could affect your credit scores right now 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 it may have a negative impact on your credit scores.

Even if BNPL credit isn’t yet factoring into credit scores, it’s a good idea to use it responsibly. Some services may allow you to pay for your purchase with a credit card, but that could mean paying off one form of debt with another.

And even if a BNPL provider doesn’t charge fees, you may incur fees from your bank. For instance, if you overdraft your bank account or don’t have enough funds to cover a payment, your bank may charge you an overdraft fee. That’s sometimes referred to as a non-sufficient funds fee.

You might want to consider the protections the BNPL provider offers too. For instance, do they have dispute resolution and fraud protection services? According to the Consumer Financial Protection Bureau (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.”

BNPL is a short-term payment option that lets you repay purchases over several 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 with CreditWise. And if you think a credit card might better suit your needs, you can compare Capital One’s 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 if 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 from Capital One. It’s free for everyone, and using it won’t hurt your credit.