Personal Loans vs. Buy Now, Pay Later: Making the Right Choice

Personal loans are a type of installment loan that you pay back with fixed monthly payments over time. However, you need to apply for a personal loan directly from a lender, such as a bank, credit union, or online lender, which means you’ll need a hard credit check to qualify — which temporarily impacts your credit score.

Most lenders require good credit and a steady source of income to qualify. You can use a personal loan for just about anything, from remodeling your bathroom to paying for a vacation. However, you usually can’t use a personal loan to pay for higher education expenses or a down payment for a house.

Every lender sets its own rules around personal loans, but in general, you may be able to borrow anywhere from $1,000 up to $100,000.¹ Repayment terms typically span three to seven years but could go as long as 12 years.² Personal loans are not free – you’ll have to pay interest on the amount you borrow and origination fees.

Borrowers with the best credit history tend to get the lowest interest rates. But don’t sweat your bad credit: Some lenders let you apply with a cosigner if your credit isn’t up to snuff.

As with any debt, a personal loan has benefits and potential downsides. Consider these pros and cons before applying:

Pros

• Flexible funding: When you take out a personal loan, you get a sum of money deposited into your bank account that you can use for almost any purpose. Some lenders offer same- or next-day funding upon approval.
• Competitive interest rates for good-credit borrowers: Some lenders offer rates starting around 6%, which are much lower than most credit card APRs. There is a caveat, though. You need a strong credit history to qualify for low rates, as bad-credit borrowers can pay as much as 36% interest for personal loans.³
• High loan amounts: Depending on the lender, you may be able to borrow as much as $100,000.
• Long repayment terms: You might get up to seven years to repay your loan (some loans can go even longer), making your monthly payments more affordable. But the longer your loan term, the more interest you’ll pay in the long run.
• Potential credit boost: Your lender will likely report your payments to the credit bureaus, so on-time payments could help improve your credit score.

Cons

• Interest charges: Personal loans have an associated cost – even the most competitive lenders will charge interest on any amount you borrow. If you have bad credit, expect high interest rates, up to 36%.³
• Origination fee: Some lenders charge a fee to lend a personal loan, often 1% to 8% of your loan amount.⁴ On a $10,000 loan, that fee could cost anywhere from $100 to $800.
• Difficulty qualifying: You may need good credit and a stable source of income to be approved for a personal loan.
• Hard credit check required: While you can typically see if you’re pre-qualified, a hard credit inquiry is required for approval. This results in a temporary, minor drop in your credit score.
• Impact on debt-to-income (DTI) ratio: Since your personal loan will likely appear on your credit report, it could increase your DTI ratio. A high DTI ratio can make qualifying for a mortgage or other loans harder.
• Not always worth it: Even if you qualify for a personal loan, it may not be the best payment option for certain expenses. Instead of going into debt, it might be better for your finances to save and cover the costs upfront. Opening a high-yield savings account can help you reach your goals.

Buy now, pay later loans work exactly like the name implies: these programs let you purchase an item immediately and pay it off over time – that is, buy something now and then pay for it later.

You’ll usually pay a portion of the item upfront, maybe 25% of the cost. Then, you’ll make equal payments over a set period. Some BNPL plans offer a six-week term, while others give you up to a year.

BNPL is a type of point-of-sale installment plan. You pay it back in equal installments and can often choose this financing option at checkout.

Many BNPL companies don’t charge any interest or fees for the loan, making them an easy way to finance a purchase without accruing extra charges. If you miss payments, you could be subject to late fees, potentially impacting your credit score.

Shoppers who need something now – like a replacement appliance or a new laptop for a side hustle – may find a lot of benefits to buy now, pay later plans. However, there are also potential cons to consider, especially if you’re still working to understand personal finance better.

Pros

• Fast application: You can often select BNPL at checkout and get an immediate decision about whether you qualify.
• Minimal credit requirements: You don’t necessarily need an excellent credit history to be approved for BNPL.
• Interest-free payments: Some providers don’t charge interest on your purchase.
• Ability to spread out a purchase over time: Instead of coughing up a large sum upfront, you can get an item immediately while paying it off over a few weeks or a year.
• Wide availability: Hundreds of retailers are offering BNPL as this financing option has become increasingly popular in recent years.⁵

Cons

• Late fees: You may have late fees if you miss payments.
• Ability to hurt credit: Missing payments could also lower your credit score.
• Potentially no credit score boost: While a BNPL provider may report late payments, it may not report on-time payments. Opting for BNPL, therefore, may not help you build credit the same way a personal loan or responsible credit card use might.
• Upfront down payment: Although you can spread your payment out over time, you’ll probably still need to pay something upfront, often 25% of the item price.
• Potential for interest: Some BNPL programs charge high rates, around 30%, if you opt for a long-term repayment or purchase an expensive item.⁶
• Temptation to overspend: Because BNPL makes shopping easier, you might spend more than you can afford. Juggling multiple buy now, pay later loans could lead to an inability to repay one or more down the road – and thus lead to late fees and damaged credit.

Personal loans and buy now, pay later loans allow you to cover expenses you might otherwise not be able to afford – and then repay what you borrow over time. But there are key differences between the two payment options to consider:

Purpose

Personal loans provide a lump sum of money upfront that you can use to meet a substantial financial goal, like consolidating debt, renovating your kitchen, or paying for a wedding.

BNPL programs, on the other hand, come in handy when you’re shopping for a pricey item, such as furniture, electronics, or a new mattress, and want to spread out the payment over four or more payments.

Repayment terms

Generally speaking, you’ll have more time to repay a personal loan and less time with BNPL. Common personal loan terms span three to five years, though you might find terms as short as one year or as long as 12 years.

BNPL repayment terms will vary, too, but tend to be shorter than personal loan ones. For instance, BNPL company Affirm typically has loans that last three, six, or 12 months⁷, while PayPal’s Pay in 4 program gives you just six weeks to pay off your item.⁸

Interest and fees

Personal loans come with interest charges, which are assigned based on your credit. Some lenders offer lower interest rates, around 6% APR, to creditworthy borrowers, but borrowers with bad credit should expect high interest rates. On a personal loan, your rate is typically fixed over the life of the loan. Some lenders also charge an origination fee, which is a percentage of your loan amount that they may deduct from the amount you borrow.

Many BNPL programs don’t charge interest or fees as long as you stick to your repayment schedule. That said, some start to charge interest if you opt for a longer repayment term or a pricier item. For example, PayPal Pay in 4 doesn’t charge any interest, while Affirm charges an interest rate if you need more than four payments or purchase an expensive item.

Application process

Applying for a personal loan is more time-consuming. than applying for BNPL Many lenders let you check your rates online with a soft credit check. But if you want to move forward with a loan, you must submit a complete application.

Applying usually involves uploading documentation, such as pay stubs, and allowing a hard credit inquiry, which can temporarily ding your credit. You may have to wait a few business days for the lender to process your application and transfer funds into your bank account.

On the other hand, BNPL has a straightforward application process that only takes a minute or two. If your retailer offers it, you can choose BNPL at checkout. After a soft credit check, you’ll instantly see whether you’re approved.

Loan amount

When it comes to personal loans, you usually have to borrow a minimum of $1,000 or $2,000. Some lenders let you borrow up to $35,000, some max out at $50,000, and others may offer up to $100,000.

The amount you can finance with a BNPL service will vary, but according to the Consumer Financial Protection Bureau (CFPB), the typical pay-in-four structure lets you borrow up to $1,000.⁹

Impact on credit

A personal loan tends to impact your credit more than BNPL. You usually need decent credit to qualify for a personal loan in the first place. A personal loan lender will run a hard credit check when processing your application, which can knock a few points off your score. Once funded, your loan could increase your debt-to-income ratio.

It’s not all bad, though. Making on-time payments on a personal loan can help build your score. Payment history makes up 35% of a FICO® credit score, so keeping up with payments can have a positive effect in the long run.^10,11 Late payments, however, will drag down your score.

As for BNPL, you don’t necessarily need high credit to qualify. A lender will only run a soft credit check, which won’t hurt your credit. However, BNPL programs may not report your on-time payments to the credit bureaus, so fulfilling your BNPL agreement may not help build your credit. On the flip side, a BNPL provider might report late payments, so be careful not to miss any.

A personal loan could be a fit for you if:

• You’re looking to finance a large project or goal
• You want several years to pay back your loan
• You have good credit and can qualify for a low rate
• You want to boost your credit with on-time payments

On the other hand, BNPL might make more sense if:

• You want to make a purchase immediately
• You can qualify for a 0% interest rate
• You’re confident you can keep up with payments
• You only need a relatively small loan

You may also decide neither option is right for you if you can cover the cost of a purchase upfront. For instance, getting a personal loan to go on vacation usually doesn’t make sense since your trip may cost you a lot more than its initial price tag due to interest charges. Saving up for a big purchase, especially one that’s a want and not a need, is preferable to taking on debt.

If, on the other hand, if you can easily pay back a BNPL loan and get a 0% rate, there’s little risk to choosing this option. Just make sure you stick to your repayment schedule. Many lenders let you set up autopay so you can set it and forget it without worrying about falling behind.

Like credit cards, personal loans and buy now, pay later loans can help you pay for significant purchases when you don’t have the funds upfront. While both can be useful in emergencies, you’re still borrowing money – which means your finances and credit score are somewhat at risk.

If possible, start working on building an emergency fund in a high-interest savings account. That way, the next time you have an unexpected expense, you have the money to cover the cost without taking on debt.

What are the best BNPL services?

Some leading BNPL services include Affirm, Afterpay, Klarna, Zip (formerly QuadPay), PayPal Pay in 4, and Sezzle. Along with selecting BNPL at checkout from certain retailers, you can download some BNPL providers’ apps and shop directly through them at their partner stores.

Which retailers offer BNPL?

Hundreds of retailers offer BNPL, including Airbnb, Amazon, H&M, Instacart, Sephora, and Target. You can check with an individual store to see if it offers BNPL or browse participating stores through a BNPL app.

Does BNPL help your credit score?

BNPL shouldn’t hurt your credit score as long as you pay your loan back on time, but it probably won’t help it, either. Your loan term might be too short for a BNPL provider to report your on-time payments to the credit bureaus.