Blog

‹ Back

BNPL Vs. Personal Loan? Here’s Why Personal Loans Win

 

 

What Are Personal Loans?

Personal loans are frequently used to fund costly expenses, like home renovations or car repairs. They may also be used to consolidate debt. 

With a personal loan, you can borrow a fixed amount of money and pay it back over time. It’s your responsibility to repay the loan in installments, including interest and applicable fees.  Most personal loan amounts range from $100 to $50,000 and offer terms from 6 to 60 months. 

You can get a personal loan from a bank, credit union, or other financial institutions. 

 

 

When Are BNPLs A Good Idea?

There are some cases where BNPLs make sense. Some examples include: 

Small Purchases: A BNPL might make it easier to budget for a small purchase by splitting up the payments over time.  

One-Time Purchase: Say you need to buy a laptop for school, but you don’t have enough money in your account. A BNPL service can help you stay on budget by splitting up your payments. Just make sure you have a clear repayment plan to avoid fees or interest.

Promotional No-Interest Offers: If you qualify for a BNPL service that offers a 0% promotional rate, a BNPL service can offer a cheaper

way to borrow than a credit card.   

 

When Are BNPLs Not A Good Option?

Be sure to consider the following potential drawbacks of a Buy Now Pay Later service:

They Advertise No Late Payment Fees Heavily: While many BNPL services promote no fees, there are repercussions if you miss a payment. If you stop making payments, it may be reported to the credit bureaus, which can damage your credit score. If you’ve missed payments for months, your loan can be charged off and transferred to a collection agency. 

BNPL Features Can Be Hard To Understand: Some BNPL borrowers struggle to understand how a BNPL service can impact their credit score and why they were charged a fee or interest payment when they missed a payment. Trying to resolve a dispute with a BNPL service was also listed as being hard to understand in a study by the Financial Consumer Agency of Canada.

Risks Of Over-Borrowing And Over-Indebtedness: Since BNPL services help you break up your payments over time, you might not realize how much your purchases can accumulate over time. This can lead to problems with budgeting, causing you to delay other bill payments or requiring an additional loan to make a repayment.

When Personal Loans May Be The Smarter Choice

There are several reasons that a personal loan might be a better option than a BNPL service, but it depends on your circumstances.  

Better For Managing Larger Expenses: In general, a personal loan gives you access to a larger sum of money than a BNPL service.

More Flexible: When you’re approved for a personal loan, you can spend the money just about any way you like. With a BNPL service, on the other hand, the loan is directly tied to a specific purchase. 

More Regulations: Personal loans offer more regulations and consumer protections than BNPLs.  

Opportunity To Consolidate Debt: You can use a personal loan to consolidate debts with a higher interest rate. 

Helps Build Credit Over Time: With on-time payments, you can use a personal loan to build your credit score. 

 

When Personal Loans Should Be Reconsidered

Consider the following potential downsides of a personal loan before applying:

Requires A Credit Check: Most BNPL services do not require a credit check for standard short-term installment plans, making them accessible even to users with limited or poor credit history.

Approval Process May Take Longer: The approval process of a personal loan can take upwards of several days, depending on the lender and your financial profile.

Interest Rates Vary Based On Creditworthiness: If you have poor or limited credit history, you could face higher rates or be denied a loan altogether. Lenders use your creditworthiness to gauge risk, so improving your score before applying can lead to significant savings over the life of the loan.

 

FAQs

Is there any reason not to use a buy now pay later service?

Yes, when you use a BNPL service, there’s a risk of over-borrowing and going into debt. Missed payments can result in fees or interest payments and may be reported to the credit bureaus, which can damage your credit score. To mitigate these risks, make sure you understand the terms of your BNPL agreement and have a plan for how you will repay the money on time.

What are the disadvantages of BNPL?

Most BNPL plans don’t help build your credit history unless the provider reports on-time payments. Plus, easy access and delayed payments can tempt users to buy more than they can afford.

What is better: a personal loan or a credit card purchase?

If you’re making a large purchase and can qualify for a personal loan with an interest rate that’s lower than your credit card, a personal loan is probably the better option. If you can’t qualify for a personal loan, or you just need to make a small purchase that you know you can pay back quickly, you may find your credit card is a better option. 

What’s the problem with “buy now pay later?”

Buy now pay later services can result in over-borrowing and debt, especially if you take on multiple BNPLs at one time. Missing a payment can also result in fees. To avoid any unwanted surprises, make sure you understand the terms and conditions of a BNPL service before you borrow.