BNPL’s Disadvantages
With this type of loan arrangement, there are some possible dangers to be aware of.
- Terms may differ. Before committing to a BNPL loan, it’s critical to understand the details of the arrangement. For example, 0% interest may not last the loan term, leaving you with costly finance costs later on, and there may be excessive penalties if you skip or miss a payment.
- Some have set fees. These schemes include a fixed fee in your monthly payments, which can cost you more over the life of the loan than simply purchasing the item outright.
- They do not aid in the development of credit. It will not boost your credit if you pay on time. However, late payments may be reported and have negative consequences.
- Overspending may be encouraged. The option to pay off a purchase over time can make it appear more affordable.
BNPL Loan Varieties
BNPL Loans are classified into two types:
- Loans with no interest: Instead of the customer paying interest on the loan, the retailer charges the third-party lending organization with these types of loans.
- Interest-bearing loans: These on-the-spot loans allow consumers to purchase right away but with interest similar to a credit card.
Typically, both forms of loans will specify a specific time frame for the loan to be repaid in full. For example, if the item you’re interested in provides a no-interest four-part installment plan on a $1,000 purchase, you’ll make equal payments of $250 each month for four months. If you do not make your monthly payments in full, you may be liable to penalties and other costs. Furthermore, suppose the BNPL comes with a 0% interest offer, and you are late or skip a payment. In that case, you may be subject to delayed interest penalties that apply retroactively to the whole debt.
Third-Party BNPL Offers vs. Credit Card BNPL Offers
Credit card providers’ versions of BNPL differ slightly from third-party point-of-sale financing. For one thing, they aren’t available before you make your purchase. However, they will appear as an option on your bill for qualifying purchases. Furthermore, these plans have a monthly payment cost applied to your installment plan.
Some may find these offerings even handier than a third-party corporate loan because you need to decide after you’ve purchased if you want to split payments using an existing line of credit. You’ll also get points if you use a rewards credit card to make the purchase.