The Rise of BNPL Loans

You’ve likely noticed many online vendors offer “Buy Now, Pay Later” (BNPL) options through companies like Klarna and Affirm to allow shoppers to pay for a portion of their items today and the remaining balance over a set period of time. Purchases can range from a new computer system to a late-night Taco Bell Crunchwrap Supreme. While these short-term financing options can be useful, they can also carry additional financial risks if not managed correctly.

What is Buy Now Pay Later? 

BNPL is a variation of a short-term loan that allows consumers to spread out the cost of a product in small installments over a set period of time, usually four payments. This option is often offered at checkout, both online and in-store. According to Investopedia, “these loans are typically interest free and rarely carry other service fees,” so long as the payments are made on time. Currently, the regulatory requirements for these loans are not as strict as other forms of credit in the United States, meaning “consumers don’t get strong protection and dispute resolution options.”

How Does BNPL Work? 

When making a purchase using the BNPL payment option, the full value of the purchase is paid for by the loan provider on your behalf. Installments are then made to the loan provider. This payment process may make returns and refunds more complicated than using the traditional method of purchasing. When making a return, a refund is issued to the loan provider. Depending on how far along you are with the installments, the loan provider will then refund you, however, these refunds may be delayed.

Does BNPL Affect My Credit Score? 

To get approved to use a BNPL loan, providers will do a soft credit check, which typically does not impact your credit score. However, like with other types of loans, a late or missing payment may be reported to the credit bureaus and will reflect poorly on your credit history. Beginning in fall 2025, FICO announced that BNPL borrowing will be included in its scoring formula. This decision came after a Capital One Shopping Research study came out that found $116.23 billion in goods and services were paid for using BNPL. This provides an opportunity for those with limited credit history looking to improve their score to do so, namely teens who may not yet have a credit card. For those who heavily rely on these short-term loans, it could affect their credit health.

Tips When Using BNPL

As with traditional forms of consumer credit, BNPL loans can serve as a great tool if managed properly. In a case where a large purchase is needed, the BNPL option allows customers to pay for an item over a time from their monthly cash flow without having to tap into their savings or emergency fund. However, these small, interest-free loans can create the illusion of affordability and may lead consumers to spend more, increasing the risk of defaulting on payments. Like with credit cards, it is important to be mindful of your spending to avoid spending beyond your means.

Helpful tips to avoid overspending and carrying a balance month to month include:

1. Build up your Emergency Fund:
No matter how much planning we do, the unexpected will inevitably occur. An emergency fund helps you to avoid relying on short-terms loans if an additional monthly expense does not fit into your monthly cash flow. A general rule of thumb when it comes to building up your emergency fund is:

• • Three (3) months’ worth of living expenses for couples with two sources of income
  • Six (6) months’ worth  of living expenses for those who are single or for couples with one source of income

To learn more about building an emergency fund that aligns with your goals and circumstances, check out Can Your Emergency Fund Withstand… An Emergency? And, reach out if you’d like to discuss your personal emergency fund – rules of thumb are helpful starting points but we can help you determine the appropriate target specific to your life and needs!

2. Create a Budget:
Creating a budget will help to build the habit of planning for larger expenses coming down the pipeline. YeskeBuie provides a 12-Month Cash Flow template to Clients who are looking to gain more control around their monthly cash flow. There are also many useful budgeting apps available on the market – like Monarch Money, Rocket Money, or Quicken – that allow you to link your checking and savings accounts and credit cards to provide you with visibility and management of tracking and goals across all accounts in one place.

3. Pause Before You Buy:
Studies have shown that online shopping releases dopamine in the brain. NeuroLaunch notes that, “when we encounter a potential purchase, our brain doesn’t just see an object – it sees a promise of pleasure, a potential boost to our mood or status.” The ease of making a purchase and instant gratification can lead to the slippery slope of overspending and accumulating debt through online shopping. If a purchase seems impulsive, try putting the item in your cart and wait for 24-48 hours before paying for said item.

Thanks to technology, we live in a world where we are able to get anything we desire instantly. But, as the old adage goes, nothing in life is truly free. BNPL loans can offer flexibility and a sense of financial freedom if used wisely. However, they can quickly become expensive if mismanaged. Fortunately, your YeskeBuie team is by your side to help manage and navigate these decisions with clarity and confidence. We are great people to think with!^®