What Is Buy Now, Pay Later Vs. a Personal Loan?

Buy now, pay later loans work exactly as the name implies. They 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 payment plans offer a six-week term, while others give you up to a year.¹

BNPL is a type of point-of-sale installment plan. You pay the money 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. However, if you miss payments, you could be subject to late fees, potentially impacting your credit score.

While shopping online, some merchants allow you to apply for a buy now, pay later plan at check out. To complete the application, you typically have to provide the following information:

• Name
• Email address
• Date of birth
• Phone number²

After you submit your application, BNPL companies generally perform a soft credit check to decide whether you qualify.³

Shoppers who need something now – like a replacement appliance or a new laptop for a side hustle – may find many benefits to buy now, pay later payment plans. However, there are also potential cons to consider, especially if you’re still building your knowledge about personal finance.

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. That’s because most buy now, pay later companies don’t require a hard credit check.⁴
• Interest-free payments: Some providers don’t charge interest on your purchase.⁵
• 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 offer BNPL as this financing option has become increasingly popular recently.⁶

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.
• Potential for interest: Some BNPL programs charge high rates, around 30%, if you opt for a long-term repayment or purchase an expensive item.⁷
• 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 lead to late fees and damaged credit.

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. This temporarily impacts your credit score.

That said, as you make on-time payments on your personal loan and other accounts, your credit score should recover.

Most lenders require good credit and a steady source of income to qualify. You can use a personal loan for just about anything, from debt consolidation to remodeling your bathroom or 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 up to $100,000.⁸ Repayment terms typically span two to seven years but could go as long as 12 years.⁹ 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 you can’t meet its personal loan requirements on your own.

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 starting rates that 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.¹⁰
• High loan amounts: Depending on the lender, you may be able to borrow as much as $100,000.⁸
• 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.⁹
• 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%.¹⁰
• Origination fee: Some lenders charge a fee to lend a personal loan, often 1% to 8% of your loan amount.¹¹ 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.¹²
• 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.

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:

A personal loan could be right for you if you’re looking to finance a large project or goal, want to pay back the loan over several years, and want to boost your credit with on-time payments. On the other hand, a buy now pay later loan could make more sense if you can qualify for a 0% interest rate, only need a relatively small loan and want to make a purchase immediately.

Before moving forward, compare the total borrowing costs of each option and consider alternatives like saving up for a purchase. If you want to explore other financing solutions, read our guide on the best ways to borrow money.