If you need to make a large purchase, say a new laptop or dishwasher, but you can’t afford to pay all at once, you have options.
With a buy now, pay later (BNPL) loan, you can split up the cost into more manageable installment payments. Or, you can always turn to your credit card to help you cover the cost.
While a BNPL loan and a credit card both allow you to purchase an item immediately and pay it off over time, there are key differences between the two.
In this article, we highlight how BNPL and credit card payments work, how they differ, and the pros and cons of each.
How Does a Buy Now, Pay Later (BNPL) plan work?
A buy now, pay later (BNPL) loan is a short-term financing option that allows you to break large payments into more affordable installments and pay them back over time. Some well-known BNPL lenders in Canada include Klarna, Affirm, and Afterpay.
There are two main types of BNPL plans, including:
- Equal payment plan. You make regular payments (installments) at an agreed frequency until you pay the balance in full.
- Deferred payment plan. You agree to pay the total balance you owe by a certain date, with no set payment amounts.
How Does a Credit Card Payment Work?
With a credit card, you can make purchases up to your credit limit. Credit cards are an example of revolving credit. Once you pay your balance, you get access to more credit. Then you can spend it, pay it off, and borrow again. If you can’t pay your full bill and you have to carry a balance, you are charged interest – which can add up.
Some credit cards in Canada offer installment plan features that are similar to a BNPL. You can choose to split larger credit card purchases into installment plans that either charge a lower interest rate or a standard monthly fee.
For example, TD Bank allows customers to turn eligible purchases into equal monthly payments for a fee and 0% interest.
BNPL vs. Credit Cards: What’s the Difference?
When trying to decide between a BNPL and a credit card, there are several key differences to consider, including:
Type of credit
- BNPL: Offers a fixed-term installment plan. You pay back the money in equal installment payments over a period of time. For example, you make a $1,000 purchase and pay it back in four equal installments of $250 over four months.
- Credit card: Offers a revolving line of credit. You can borrow up to a maximum amount (credit limit), repay and borrow again. There is flexibility in how much you pay at one time. You can pay the minimum payment up to the full balance.
What about Interest charges?
- BNPL: Some BNPL loans come with 0% interest, provided you pay your installment on time. However, late fees may apply if you fail to make your payment on time.
- Credit card: You will be charged interest on any balance you carry from one month to the next. Interest rates can vary depending on the credit card you choose and your credit score.
Credit check
- BNPL: Hard credit checks are not always required when using a BNPL plan.
- Credit card: A hard credit check is required when applying for a new credit card.
Credit score
- BNPL: In the past, BNPL were not incorporated into credit scoring models, meaning you couldn’t use it to improve your credit score. However, credit scoring company FICO has incorporated BNPL into its new scoring model.
- Credit card: Credit card use is reported to the credit bureaus and can increase or decrease your credit score.
Flexibility
- BNPL: When you use a BNPL to make a purchase, you are generally locked into a payment schedule. For example, four installment payments over four months.
- Credit card: With a credit card, you have more flexibility around how you repay your balance.
Acceptance
- BNPL: Offered by certain retailers and credit card companies.
- Credit card: Widely accepted around the world.
Rewards
- BNPL: With many BNPL plans, you don’t have the opportunity to earn rewards or other benefits.
- Credit card: Many credit cards offer the opportunity to earn rewards, points, and other perks.
Pros and Cons of BNPL vs. Credit Card
To make a more informed decision about whether a BNPL or credit card is right for you, consider the pros and cons of each option.
BNPL pros
- Helps with budgeting. You can purchase something you need and spread the payment out over time to fit your budget.
- No interest payments. Providing you make your payments on time, many BNPLs allow you to avoid paying interest.
- Easy to qualify for. Since many BNPLs don’t require a hard credit check, it can be easier to get approved.
BNPL cons
- Late fees. Watch out for hidden late fees. If you miss a payment, that’s when charges kick in with many BNPL’s.
- Temptation to overspend. A BNPL may encourage you to overspend by allowing you to make a purchase that you really can’t afford.
- More limited acceptance. Not all retailers offer BNPL options.
Credit card pros
- Widely accepted. Credit cards are accepted at most places around the world.
- Credit building. With a credit card, you have the opportunity to build your credit score with responsible use.
- Opportunity to earn rewards. There is a wide range of credit cards that allow you to earn rewards, points, cash back, and other perks based on your spending habits.
Credit card cons
- Qualification criteria. If you don’t have a good credit score, you may find it difficult to qualify for a credit card.
- High interest. Some credit cards charge extremely high interest rates, especially if you have a lower credit score.
- Credit damage. Applying for a credit card requires a hard credit inquiry which can temporarily lower your credit rating.
BNPL vs. Credit Cards: What Will You Choose?
Buy now, pay later plans and credit cards can be great tools to help you budget for an item you need, provided you have a plan to repay the money on time. Without a plan, you risk late fees, high interest charges, damage to your credit score, and the accumulation of debt.
If you’ve used a BNPL plan or your credit card to fund purchases that you haven’t been able to repay, consider speaking with a Licensed Insolvency Trustee (LIT). A LIT is a debt professional who can help you deal with rising debt levels. A LIT can assess your financial situation and recommend a path forward, which may include formal debt services like a Consumer Proposal or Bankruptcy.
For a free, no-obligation consultation, call Allan Marshall & Associates at 1-888-371-8900 or complete our online contact form. You don’t have to deal with debt alone; we can help!
