Personal Loans Vs. Buy Now, Pay Later

Buy now, pay later programs work exactly like the name implies. They let you purchase an item immediately and pay it off over time. 

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 programs offer a six-week term, while others give you up to a year. 

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

Many BNPL programs don’t charge any interest or fees, making them an easy way to finance a purchase without accruing extra charges. If you miss payments, though, you could be subject to late fees. 

BNPL enables you to get an item right away, even if you can’t cover the full cost upfront. But be sure to keep up with payments. Missing them could cost you and damage your credit score. 

One Example: BNPL at Target

Thousands of retailers offer BNPL on qualifying items, from Amazon to Target to Pottery Barn. Let’s say, for example, that you’re buying a new sofa from Target. When you pay online, you can choose BNPL provider Affirm as your financing type, assuming your item is eligible.

At this point, this BNPL service will run a soft credit check. With a soft inquiry, the financier can view your credit without dinging your credit score. 

You’ll get an immediate decision about whether you qualify. If approved, you’ll choose your terms (Affirm offers three, six, or 12 months at Target, as per Target’s website) and agree to the BNPL agreement. 

It’s also possible to choose Affirm when you shop in person at Target. First, you’ll need to download the Affirm app and get approved for the Affirm virtual card. Then, add it to Apple, Google, or Samsung Pay on your phone and use it at checkout. 

Personal loans are another 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. 

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 you may be able to borrow anywhere from $1,000 up to $100,000. Repayment terms typically span three to seven years. Personal loans are not free — you’ll have to pay interest on the amount. 

Borrowers with the best credit tend to get the lowest interest rates. Some lenders let you apply with a cosigner if your credit isn’t up to snuff. Besides interest charges, lenders may also charge an origination fee to lend the loan. 

Personal loans offer flexible financing for almost any expense, but they might not be the most affordable option when considering the interest charges.

Learn more about the ins and outs of personal loans. 

Both personal loans and BNPL help you pay off a big-ticket purchase over time, but they operate differently. Let’s take a closer look at where they overlap and how they differ from each other. 

Purpose 

Personal loans provide a lump sum of money upfront that you can use to meet a big financial goal, such as 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

Common personal loan terms span three to five years, though you might find terms as short as one year or as long as seven years. BNPL repayment terms will vary, too, but tend to be shorter than personal loan ones. As mentioned above, Affirm offers a maximum term of 12 months at Target. PayPal’s BNPL service, known as PayPal Pay in 4, gives you six weeks to pay off your item. 

Generally speaking, you’ll have more time to repay a personal loan and less time with BNPL. 

Interest and Fees 

Many BNPL programs don’t charge any 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 10% to 30% APR for orders over $100 at Target. 

Personal loans come with interest charges, which are assigned based on your credit. Some lenders offer rates starting around 6% APR to creditworthy borrowers. 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. 

Application Process 

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. 

Applying for a personal loan, on the other hand, is more time-consuming. Many lenders let you check your rates online with a soft credit check. But if you want to move forward with a loan, you’ll need to 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 couple of business days for the lender to process your application and transfer funds into your bank account. 

Loan Amount 

The amount you can finance with a BNPL service will vary. Going back to the Affirm example at Target, it’s available for items starting at $100 up to $15,000.  

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 offer up to $100,000. 

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. As mentioned, 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 score, according to myFICO.com, so keeping up with payments can have a positive effect in the long run. 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. 

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. 
• Competitive interest rates for good-credit borrowers: Some lenders offer rates starting around 6%, which are much lower than most credit card APRs. 
• High loan amounts: You may be able to borrow as much as $100,000, depending on the lender. 
• Long repayment terms: You might get up to five or seven years to pay back your loan, making your monthly payments more affordable. But the longer your term, the more interest you’ll pay in the long run. 
• On-time payments can help credit: 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 aren’t free — even the most competitive lenders will charge interest on any amount you borrow.
• Origination fee: According to Forbes, some lenders charge a fee to lend a personal loan, often 1% to 8% of your loan amount. On a $10,000 loan, that fee could cost anywhere from $100 to $800. 
• May be tough to qualify: You may need good credit and a stable source of income to be approved for a personal loan. 
• Could increase debt-to-income (DTI) ratio: Since your personal loan will likely show up 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 can qualify for a personal loan, it may not be wise to borrow for certain expenses. Instead of going into debt, it might be better for your finances to save up and cover the costs upfront. 

Buy now, pay later programs have pros and cons, too: 

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 great credit to be approved for BNPL. 
• Interest-free payments: Some providers don’t charge interest on your purchase. 
• Spread out 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: Thousands of retailers are offering BNPL as this financing option has become increasingly popular in the past few years. 

Cons

• Late fees: If you miss payments, you may incur late fees. 
• Late payments could hurt credit: Missing payments could also drag down your credit score. 
• On-time payments won’t necessarily help credit: While a BNPL provider may report late payments, it may not report on-time payments. Opting for BNPL, therefore, won’t help you build credit. 
• 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. 
• May charge interest: Some BNPL programs charge high rates, around 30%, if you opt for a long-term or an expensive item. 
• May tempt you to overspend: Because BNPL makes it so easy to shop, you might spend more than you can afford. 

A personal loan could be a good 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, it usually doesn’t make sense to borrow a personal loan to go on vacation, since your trip may cost you a lot more than its initial price tag due to interest charges. If you can save up for a big purchase, that might be preferable to taking on debt.

If, on the other hand, you can easily pay back a BNPL loan and get a 0% rate, there’s not much 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.

BNPL and personal loans can help you pay for big purchases when you don’t have the funds upfront. BNPL can help you make purchases online and in stores, whereas a personal loan offers money upfront that you can use on home renovation, debt consolidation, or other purposes. 

Both these financing options are installment loans, though, and it’s always good to be cautious about taking on debt. BNPL’s convenience can make it particularly tempting to spend beyond your means.