What is buy now pay later (BNPL)?


Whether you want to shop at an online store or make a big purchase in-store, buy now pay later (BNPL) is a more flexible way to buy products or services. It allows you to pay for your purchases over time rather than having to fund a large purchase immediately. 

Although this sounds flexible and efficient, BNPL services aren’t for everyone. A BNPL plan is a form of credit that can negatively affect your credit score if you miss repayments. 

In this article, we’ll cover everything you need to know about entering into a BNPL agreement, from how they work to the potential disadvantages of using this financial product. 

Let’s get to the following commonly asked questions: 

  • What does BNPL mean?
  • How does BNPL work?
  • What is the difference between credit cards and BNPL?
  • What are the different BNPL platforms?
  • What are the disadvantages of BNPL?

Q1. What does BNPL mean?

Buy now pay later (BNPL) allows buyers to purchase items and defer paying by choosing the BNPL payment option at checkout. Typically, the consumer will make monthly payments over a short period without incurring extra fees. 

BNPL providers are often third-party companies that partner with business owners and major retailers to offer customers the ability to split their payments into interest-free instalments. 

You may recognise popular BNPL companies like Afterpay, Klarna, and Zip. 

Q2. How does BNPL work?

BNPL financing allows consumers to pay for products over time, usually through an instalment plan. This can range from a few weeks to months depending on the purchase size. Consumers typically get reminders of payment due dates through buy now pay later apps.

When consumers choose to use a BNPL plan at checkout, they will sign up with the provider and give some basic personal finance information. They will likely run soft credit checks to ensure the applicant is eligible for a buy now pay later account.

Once the in-store or online payment is made, the BNPL provider pays the retailer on the consumer's behalf. The consumer is responsible for making the split payments to the BNPL provider according to the agreed-upon payment schedule. 

Q3. What is the difference between credit cards and BNPL?

Credit cards and BNPLs are both forms of credit that allow consumers to make purchases and defer payments, but there are several differences between the two, including:

  1. Interest charges: Credit cards charge interest on unpaid balances, while most BNPL services offer interest-free payments for a fixed period. However, if the consumer fails to stick to the Buy Now Pay Later plan, the service will charge late fees. 
  1. Payment schedule: Credit cards require monthly payments that the consumer can pay off in full or carry a balance from month to month. In comparison, BNPL services provide fixed payment options over a short period, ranging from a few weeks to a few months.
  1. Credit checks: A credit card company requires credit checks as part of the application process, while many BNPL services do not. This means BNPL services may be more accessible to consumers with bad credit.

Q4. What are the different BNPL platforms?

Several buy now pay later providers are available in Australia, each with unique features and offerings. Here are the most popular BNPL platforms:

  1. Afterpay is one of the largest BNPL platforms in Australia, with over 16 million active customers worldwide. Afterpay offers interest-free payments over four instalments, and users can manage their payments through the Afterpay BNPL app.
  1. Klarna is a global BNPL platform that launched in Australia in 2020. Klarna offers interest-free payment plans over four instalments and longer-term financing options, with interest rates ranging from 6.99% to 24.99%.
  1. Openpay offers interest-free payment plans over a range of 2 to 24 months. Openpay also offers longer-term financing options with interest rates ranging from 9.9% to 17.9%.

Q5. What are the disadvantages of BNPL?

While buy now pay later payments provide consumers with more flexibility around their purchases, there are some potential downsides to be aware of. These include: 

  1. Late fees and interest charges: While BNPL services typically offer interest-free financing for a fixed period, they charge fees for late or missed payments. These fees can add up quickly and make it difficult to pay off the balance, leading to financial difficulty.
  1. Negative impact on credit scores: If you cannot make BNPL payments on time, it can negatively affect your credit score. Missed payments will be reflected on your credit reports, making it harder to obtain credit in the future. 
  1. Limited consumer protection: Some BNPL services do not offer security from the Consumer Financial Protection Bureau, leaving consumers vulnerable to fraudulent or unauthorised transactions.
  1. Financial hardship: A BNPL company encourages consumers to spend more than they can afford, leading to financial difficulty in the future, particularly if you face late payment fees.

Summing up

Buy now pay later (BNPL) services can provide consumers with increased payment flexibility and the ability to purchase more expensive products by paying over time. 

However, before deciding whether to use BNPL services, it's crucial to fully understand the terms and conditions of your contract, including how they may affect your credit score and the consequences of missing payments. 

If you found this article helpful, we invite you to stay updated with the WeMoney blog, where we regularly share financial advice. Additionally, you may be interested in reading our article "What is a credit card obligation?" for further insights into managing your finances.

Wait! We’d love to hear your thoughts

If you enjoy using our app, please take a moment to rate it in the App Store. Your feedback in the past has tremendously helped us at WeMoney to improve the app to help it be the best that it can be. A massive thanks to each one of you for making that happen!

Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

Turn your learnings into practice
Try WeMoney today.