Home What is Buy Now, Pay Later (BNPL)?

What is Buy Now, Pay Later (BNPL)?

With the increasing popularity of on-demand services and rapidly developing e-commerce, more and more consumers want to be able to obtain products immediately and pay for them later.

Though banks have come up with the solution to the problem long ago, providing their clients with credit schemes often appear complicated to arrange. This usually involves giving various documents, and the risk of turning the loan down can be relatively high. That’s why FinTech startups and companies developed a Buy Now, Pay Later (BNPL) solution.

Buy Now, Pay Later financing was gaining popularity relatively fast among buyers though a real boost it received during the Covid-19 pandemic. The e-commerce sales skyrocketed and customers locked in their houses started buying even more than in the pre-pandemic times. BNPL services allow customers to buy as much as they want; however, this financing option doesn’t come without certain risks.

This article will look into what BNPL is, how it works, and what advantages and disadvantages this type of loan involves.

What is Buy Now, Pay Later?

Buy Now, Pay Later is a type of short-term loan that allows customers to buy products in equal installments, often interest-free. BNPL suits best for purchasing consumer goods. For example, you won’t obtain any property or pay for college loans with BNPL.

Instead, you can buy things in e-commerce stores or brick-and-mortar shops. In other words, Buy Now, Pay Later is simply one of the convenient payment options among many others offered by online and offline shops.

Various FinTech companies provide Buy Now, Pay Later services, including Klarna, PayPal, American Express, and many others.

The number of BNPL offerings is steadily growing. According to Statista, the global use of the service in domestic e-commerce payments has increased from 0.4% in 2016 to 3% in 2021 in 41 countries, being most widespread in Sweden – 25%, Germany – 20%, Norway – 18%, Finland – 13%, Denmark – 12%, Netherlands – 12%, Australia – 11%, New Zealand – 10%, and others.

There are several reasons why consumers prefer utilizing BNPL solutions rather than turning to their credit cards. Here are some of them:

  • pandemic financial instability and inability to pay for goods in a one-time payment, customers divided their payments into smaller parts;
  • the possibility to buy more goods at a time as the first payment is less than 50%, and the rest of the sum is divided over several weeks or months;
  • unlike many credit services, BNPL performs soft credit checks, meaning that the service withdraws no credit points from customers’ credit scores;
  • simple and easy to arrange. For this reason, BNPL is also known as “point of sale installment loans,” as customers can use it right at a check-out counter;
  • BNPL offers specific dates when installments should be covered with payments, so buyers always know when they need to pay next time.

How Does Buy Now, Pay Later Work?

When opting for a BNPL solution, customers get a mini-loan that is divided into several installments. They can be weekly, bi-weekly, or monthly paid. The payment period depends on particular service terms and conditions.

Usually, BNPLs charge interest for using their services, though they often provide “interest-free” periods. Therefore, if customers manage to pay their balance during an interest-free period, they won’t be charged any interest at all. However, if a buyer misses their payments, they’ll have to pay the outstanding installments with accruing interest.

Here is a step-by-step example of how Buy Now, Pay Later works.

  1. A customer is making a purchase of $300 and decides to use a BNPL payment option; the payment options can be located in a shopping cart on a retail e-commerce site or at a checkout counter in an offline shop;
  2. BNPL performs the customer’s credit score check (in most cases, it’s a soft credit check) and decides if they can utilize the service;
  3. When the customer is approved, they need to make a small down payment, e.g., 20 -30% of the total sum;
  4. The rest of the sum is divided into equal installments that should be paid before a specific date;
  5. The customer receives the item they bought and pays the rest of the sum via a check, bank transfer, debit card deduction, bank account, or credit card; in many cases, the sum will be withdrawn automatically.

Pros and Cons of Buy Now, Pay Later

Just like any service, BNPL has its advantages and shortcomings. Let’s have a look at the most significant ones.

BNPL Advantages

No Hard Credit Checks

Many credit lenders perform hard credit checks to understand if their client can use their service or not. This type of check can remove some credit points from the client’s credit score, but it doesn’t guarantee that the credit will be offered.

On the other hand, BNPL providers mainly perform a soft pull on a client’s credit without harming the credit score. Moreover, it’s much easier for customers to get approved for a BNPL loan as the sums lent aren’t significant.

Interest-Free Periods

BNPL companies are interested in acquiring more clients and staying ahead of their competitors. That’s why they often provide their responsible clients with interest-free periods, involving no payments in interest.

Convenience and Speed

When applying for a BNPL loan, customers don’t have to provide many documents or confirm their bank account or work-related details. Moreover, BNPL performs quick checks to keep the processing time to a minimum. The payment options are also convenient as clients can pay with their debit/credit cards, checks, money transfers, and others.

Disadvantages of BNPL

Extra Fees for Late Payments

BNPL is a perfect solution for responsible customers who always remember to pay on time. Unfortunately, if a buyer misses the payment day, they’ll be charged late fees that are usually added up with time.

After the missing payment, a BNPL provider starts charging their client with an interest that grows higher with every due date until the full payment is made. As a result, the interest rates can be relatively high, sometimes even higher than credit interest rates.

Small Credit Limits

Different BNPLs have various loan limits from several hundred to one or two thousand dollars. That’s because this service was created for small purchases. This way, the loan doesn’t depend much on your income.

Doesn’t Improve Your Credit Score

It’s not possible to improve your credit history with BNPL on-time payments because they aren’t reported to credit bureaus. However, if you skip some payments, BNPL providers can report on that, and the credit score can worsen.

Makes You Want to Buy More

Using BNPL, you can think that you’re able to buy more than you can actually afford. This happens because BNPL services require just small payments for the goods. Therefore, consumers have to think twice if they really need that unique item on Amazon or if they’re just influenced by their immediate wishes and wants.


Buy Now, Pay Later is a convenient service that allows buyers to obtain products they want online and in offline stores immediately. Therefore, to provide an outstanding experience to their customers and increase their buying power, retailers incorporate BNPL financing options in their services.

If you’re also searching for ways to develop a BNPL solution for your digital or brick-and-mortar store, Scand company is ready to help you. Scand (dotcom — software) is a successful FinTech provider with over 20 years of experience in the international software development market.

Image Credit: Provided by the Author; Thank you!

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Victoria Puzhevich
Lead Specialist

Lead Specialist at SCAND with over 16 years of experience in the IT sphere, keen on sharing expert advice and share relevant industry experience.

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