Personal loans and buy now, pay later (BNPL) payment plans are two similar but different types of lending products. Personal loans are often best for borrowing a larger sum of money and having the freedom to spend it however you choose, whereas buy now, pay later plans are more suited to buying a single item without having to pay for the full purchase upfront.
If you’re looking to pay for a large purchase but don’t have the cash to pay for it all at once, you might be wondering what financing options you have besides plunking down a credit card and incurring hefty interest charges. A personal loan and a BNPL loan are two alternatives to credit cards that are worth considering.
In this article, we’ll look at the difference between personal loans and buy now, pay later payment plans, when each type of lending might make sense for you, and the pros and cons of each type of lending practice.
Personal loans explained
A personal loan is a type of installment loan, meaning you make fixed monthly payments for the life of the loan. The loan amount can range from a few thousand dollars up to $100,000, and loan terms usually range from two to five years, though they can be longer. Other characteristics of personal loans include the following:
- Fixed interest rates and fixed payments for the entire loan term
- A lump sum of money deposited to your bank account that can be used for almost anything
- Usually, an unsecured loan, meaning no collateral is required to qualify for the loan
- This may include an origination fee, which is usually a percentage of the loan deducted from the loan amount
- Requires good credit history and steady income to qualify and get the best rates
Buy now, pay later (BNPL) loans explained
A buy now, pay later loan is an alternative type of lending. One of its primary differences from a personal loan (or credit card) is that you typically don’t have to pay interest on a BNPL loan. You will, however, need to pay late fees if you miss a payment, says CFPB Director Rohit Chopra.
“Buy now, pay later is a rapidly growing type of loan that serves as a close substitute for credit cards. While major providers don’t currently rely on charging interest, they make money through fees charged both to sellers and to consumers who don’t pay on time.”
Here are some additional features of a BNPL loan:
- Usually offered at check-out when shopping online or in-store
- Only borrow enough to cover the amount of a purchase
- Loan terms are typically short
- Borrowers pay the money back in equal payments
- More likely to accept lower credit scores
- Don’t usually charge interest but do charge late fees
It’s important to note that some BNPL lenders do not report on-time payments to the major credit bureaus. However, late payments are more likely to be reported, which will lower your credit score and hurt your credit history.
Personal loan vs. buy now pay later loan
There are several similarities between personal loans and buy now, pay later payment plans. For example, they’re both installment loans with predictable payment amounts, and they both allow consumers to make purchases without needing cash upfront.
That said, there are a number of differences you should be aware of before deciding which is the better option to borrow money—or even if an alternative to both may be the smartest move. Here are some of the differences to consider between personal loans and BNPL services:
How the money can be used
A key difference between a personal loan and a buy now, pay later plan is how the borrowed money can be spent. In most cases, a personal loan can be used for pretty much whatever you want — for example, paying for large purchases, making home improvements, or consolidating debt. By contrast, most BNPL loans are restricted to a single purchase.
Interest charges and fees
As mentioned above, a BNPL loan generally doesn’t impose an interest rate, but you will be charged late fees if you miss a payment (it should be noted, however, that a BNPL company may charge interest for longer-term loans).
Personal loans always come with an interest rate (typically, the better your credit score, the lower the rate), and they often come with fees too. One of the most common is the origination fee, which is usually 1% to 5% of the loan amount, although in some cases, it could be even higher. In order to be more competitive, many lenders may not charge origination fees, so be sure to comparison-shop before choosing a lender.
For the most part, the total cost of a BNPL service is less than that of a personal loan, but that partly depends on how you manage a BNPL plan. Like payday loans and pawn loans, which also have short loan terms, it’s easy to get into a cycle of debt and excessive fees if you can’t make your payments.
Length of loan terms
A personal loan usually gives you years to repay the loan — at least in part because the loan amount is typically much higher than a BNPL loan. You’re also required to have pretty good credit to qualify, meaning your financial situation is such that a lender feels confident you can handle the extra monthly payment.
Conversely, BNPL services are generally short-term. In fact, the most common type of BNPL loan requires you to make four payments in equal installments, with the first payment — 25% of the purchase price — due upfront at the time of purchase. CFPB Director Chopra compares a BNPL plan to “back in the day” when people paid for consumer items found in lengthy TV commercials:
“Put simply, buy now, pay later can be compared to a credit card that incorporates informercial-style payment plans. In many ways, buy now, pay later is a blast from the past, but, importantly, it is supercharged for the era of e-commerce, digital surveillance, and gamification.”
BNPL plans are among the fastest financing options available. You’re typically given the option of a BNPL plan at check-out, and approval only takes minutes to go through.
An application for a personal loan doesn’t take as long as the application process for secured loans, but it can still take a few days to receive the money in your bank account.
If you manage your BNPL loan wisely — meaning you don’t have any late payments, and you’ve paid the entire balance by the due date — there should be no impact on your credit history. It also may not be useful for helping you build credit because it doesn’t report positive information to credit bureaus.
A personal loan, on the other hand, will always impact your credit report. For one thing, a personal loan always requires a hard credit pull to verify your creditworthiness, which will temporarily drop your credit score a few points. Personal loans can also improve your credit history because lenders will always report on-time payments to the credit bureaus.
Keep in mind that late payments on either type of loan will cause significant damage to your credit score. Any increase in your personal debt may have an impact on your credit report as well.
Pros and cons of personal loans and BNPL services
Personal loans have been common for a long time, while BNPL plans have really only become widespread in the past few years. Either way, it’s important to weigh the pros and cons of each financing option.
BNPL loan pros and cons
Here are some of the pros and cons of using BNPL plans to pay for purchases:
Here is a list of the benefits and drawbacks of BNPL.
- Low credit scores may be acceptable to qualify
- Only a soft credit check is required for smaller purchases (four payments)
- The application process can be completed in minutes while shopping online or in person
- Little to no interest charges
- Equal payments
- Late fees for missed payments
- Late payments can hurt your credit score
- Easy to overspend if you take out multiple BNPL loans
- Limited to a single purchase
- Potential interest rates for long-term BNPL loans
- Down payment of 25% of the purchase price
Personal loan pros and cons
The following are some of the advantages and drawbacks of personal loans:
Here is a list of the benefits and drawbacks of personal loans.
- Lump sum of money that can be spent on multiple purchases
- Borrow larger amounts of money
- Borrowers with good credit are eligible for better interest rates than credit cards
- Helps you build credit
- Typically no collateral is needed
- Longer time to repay the loan
- Always includes interest payments
- May charge an origination fee
- Borrowers with poor credit may not qualify or need to pay a much higher interest rate
- Always requires a hard credit check
- More expensive financing option overall
BNPL vs. personal loan: which is better?
As with all things personal finance, the decision of how to borrow money is just that: personal. Having said that, there are some solid reasons to choose one financing option over another.
According to Kendall Meade, CFP at SoFi, “When comparing personal loans and buy now, pay later, one is not better than the other. It really depends on what you are using the funds for and the details of your offer. What is the interest that you are being charged? How quickly must you pay it off? What would your payments be?”
In general, if you’re making a smaller but important purchase — like a new couch, a bed, or an appliance — a buy now, pay later payment plan might be a good option. If you don’t have enough cash to buy the item upfront but can manage to pay it off in four payments, a BNPL plan is a smart move.
On the other hand, if you need to make a large purchase or use the money to consolidate higher-interest debts, a personal loan may be a better choice for you. Not only will you have more time to repay the loan, but as long as you make on-time payments, a personal loan is a great way to help build your credit history.
Alternatives to BNPL plans and personal loans
In some cases, neither of the above borrowing options may be right for you, and you may want to consider other choices. For example, do you really need the item you’re planning to buy, or could you wait six months and save up the money to buy it with cash (and thus avoid more debt)?
If you’re a homeowner and have some equity built up in your home, then when you need a large sum of money, you might want to consider taking out a home equity loan or a home equity line of credit (HELOC). These will typically give you better interest rates than a personal loan, and you’ll also have more time to repay the loan amount.
Finally, you might want to check to see if you qualify for a credit card with a 0% introductory rate. If you are approved, it can work as a nice combination of a personal loan and a BNPL plan in that you won’t be charged interest in the introductory period (usually six to 18 months — sometimes longer) and you’ll have more time to pay off the balance.
- Personal loans and BNPL loans are both types of installment loans, but buy now, pay later plans usually have much shorter loan terms.
- A personal loan always comes with interest charges, while buy now, pay later plans often don’t charge interest.
- Both personal loan and BNPL billing cycles include fixed monthly payments, although BNPL loans may have more frequent due dates.
- A buy now, pay later payment plan is usually better for smaller purchases, while a personal loan is more suited to a home improvement project, debt consolidation, or a big purchase.
View Article Sources
- Want to buy now but pay later? Read this first – Federal Trade Commission
- CFPB Study Details the Rapid Growth of “Buy Now, Pay Later” Lending – Consumer Financial Protection Bureau
- Personal Loan Vs. Line Of Credit: Which Is Better? – SuperMoney
- Personal Loans vs Credit Cards: Things You Should Know – SuperMoney
- What Is Installment Buying (And How To Find the Best Deals)? – SuperMoney
- Payday Loans vs. Personal Loans: What You Need To Know – SuperMoney
- Can You Use A Personal Loan To Buy A House? – SuperMoney
- Is It Good to Pay Off Credit Card Debt with a Personal Loan? – SuperMoney
- What Are The Most Popular Types of Credit? – SuperMoney