Will Buy Now, Pay Later Replace Credit Cards?

The coronavirus pandemic changed a lot of things. How we worked, how we shopped, and how we interacted with one another were all reimagined in the wake of the deadly COVID-19 crisis. 

Spending habits changed too. Online purchases became the norm – and because many people’s financial situations were impacted, we began to rely on credit lines more often.

Both staple items and luxury goods were bought with credit cards, but that came at a cost. It’s not unknown to anyone who’s ever used one of the main credit card brands that, despite their ease of use and the ability to defer payments for a time, their convenience often comes with a price attached. Interest fees, purchase charges, cash conversion costs – all these penalties that consumers incur in the everyday use of credit cards.

But there’s already an alternative to credit cards on the market – and its popularity is on the rise. It’s called “Buy Now, Pay Later”, and people are flocking to it in droves. BNPL is a type of credit loan – or more precisely, a Point-of-sale (POS) installment loan – that allows buyers to purchase any item or service immediately, but pay for it later, either in installments or in one lump sum. 

Buy Now Pay Later Vs Credit Cards

Some people might wonder what, on the face of it, makes Buy Now, Pay Later different to any other regular kind of credit card. 

Yes, there are lot’s of similarities. Like BNPL, credit cards can be used to make purchases with retailers; and just like with a BNPL option, the cost can be repaid over time in separate installments too. Also, if you miss a payment on your BNPL plan, just like with your credit card, you will be liable for a fee and your credit score will take a hit.

However, there are far more differences between the two methods – which, depending on your circumstances, may be a pro or a con.

First, it’s a lot easier to be successful with a Buy Now, Pay Later application – the process only requires a soft credit check, as opposed to a hard credit check that almost all credit card issuers demand. This is more favorable to customers who have had credit difficulties in the past, and who find gaining access to traditional sources of credit to be problematic.

There are differences too when it comes to actually making purchases with Buy Now, Pay Later. For instance, credit cards are accepted almost anywhere, and can be employed in a variety of ways. Cardholders can also use their credit card to pay for household utility bills, or convert some or all of their credit balance into cash.

However, Buy Now, Pay Later customers are usually limited to a select few retailers and merchants, and have to make a separate application for credit with each individual purchase. Even then, each plan is different, with varying pay-back terms and late-payment penalties.

Benefits Of Buy Now, Pay Later

In addition to BNPL’s quicker and less rigorous application process, there are some important and significant benefits that come with choosing a Buy Now, Pay Later plan over a regular credit card. For many, the ease and affordability of BNPL is a major factor, as the option, if used correctly, means that customers can spread out payment costs without incurring any interest charges or fees. 

Buy Now, Pay Later also gives users the freedom, to some extent, to tailor their repayment plan according to their own individual budget, whereas credit cards are generally governed by a set rules that, once in place, are fairly inflexible.

Additionally, transparency and manageability is simpler with Buy Now, Pay Later too. With credit cards, for example, customers need only to pay back a minimum amount each month to avoid any late payment fees. However, this can result in runaway interest charges which spiral out of control, and can cost a lot more than expected further down the line.

Buy Now, Pay Later users know upfront what is expected of them, and the potential for large debt build-up is mitigated somewhat with just a finite number of payment installments.

Downsides To Using BNPL

There are, however, some drawbacks to using Buy Now, Pay Later methods over a traditional credit card though. 

One big issue with a deferred payment plan is that shoppers might overspend in the near-term, losing sight of their long-term budgetary constraints, and overload themselves with multiple BNPL plans that they are ultimately able to afford.

Hopefully, the soft-credit check associated with each purchase should stop this from happening, but, ironically, for spenders with good credit history this might not be the case.

Another problem with Buy Now, Pay Later is that users miss out on the positive benefits of credit cards, of which there are many. For instance, most credit card companies offer cash back on purchases, free Air Miles, and other points-based benefits to those who use their card regularly, as well as further enticements such as discounted car and travel insurance. Over time, however, expect companies like Affirm to display deals at retailers that consumers favor.

Payments on a credit card can also be made at our own leisure, giving you the freedom to pay off more one month when your finances allow it, or pay less when the purse strings are a little tighter.

Which Is The Best Buy Now, Pay Later Provider?

There’s been a proliferation of BNPL companies lately, each one hoping to capitalize on what is a growing industry. This is good news for customers, as variety brings with it the choice of getting the best deal for your present circumstances.

Affirm is a great option for customers who don’t want to be exposed to late payment fees, and who need a Buy Now, Pay Later provider that can facilitate high value purchases up to $17,000. However, Affirm (AFRM) does charge interest on some transactions though.

Alternatively, Sezzle is a good choice for borrowers who foresee that they might need to reschedule payments further down the line, but don’t mind paying a 25% upfront deposit at the point of purchase.

Or, for people who are willing to risk high late fees of 25% of their initial order, but who also want smart credit limits to help them stay on budget, Afterpay (AFTPF) could be the ideal provider.

Should Credit Card Providers Fear The Buy Now, Pay Later Phenomenon?

Buy Now, Pay Later isn’t a replacement for credit cards (yet), but it is a great alternative for customers who aren’t a perfect fit for more established forms for credit lending.

The trend is growing, however, and will likely become a more popular type of borrowing in the future, taking market share from the big credit card networks that currently rule the roost.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.