Understanding Personal Loans and Buy Now, Pay Later Plans

When it comes to borrowing money, you have several options, including personal loans and Buy Now, Pay Later (BNPL) plans. Deciding which type of financing is best for you often depends on what you plan to purchase, the loan offers available, and your ability to repay the loan. Generally, personal loans are ideal for large or multi-purchase events, while BNPL plans are better suited for one-off purchases or if you have poor credit.

What Is a Personal Loan?

A personal loan is an unsecured installment loan that allows you to borrow money and repay it with fixed monthly payments. Here are some common features of personal loans:

• You receive the entire loan amount at once.
• The loan has a fixed interest rate and set repayment period, meaning your monthly payment stays the same.
• There may be an origination fee, often a percentage of the loan amount, that’s taken out of the loan’s proceeds.
• Your credit history and credit score can impact your eligibility, interest rate, and fees.
• Depending on your creditworthiness and the lender’s offering, you may be able to borrow tens of thousands of dollars with a personal loan.

Personal Loan Pros and Cons

Personal loans are popular, but it’s essential to consider the pros and cons and compare your loan offers to a BNPL plan.

Pros

• Fixed payments: The loan’s fixed interest rate and repayment period mean you’ll know exactly how much to pay each month and when you will pay off the loan.
• Doesn’t require collateral: Personal loans are unsecured, meaning you won’t need to use your home, vehicle, or other assets as collateral and risk losing them if you can’t repay the loan.
• Use the money how you want: The money gets deposited into your bank account, and you can spend it on almost anything.

Cons

• Immediately starts to accrue interest: Your loan will start to accrue interest once you receive the money, although you can often repay part (or all) of the loan early without paying any prepayment penalties.
• Origination fees: Lenders may charge an origination fee, sometimes as high as 10% of the loan amount, that’s taken out of the funds you receive. However, some of the best personal loans don’t charge this fee.
• Your credit impacts your eligibility and rates: Borrowers who don’t have good credit might have trouble qualifying for a personal loan. Or, you might only receive offers that have very high interest rates and fees.

What Is Buy Now, Pay Later?

Buy Now, Pay Later (BNPL) plans offer financing for a single, specific purchase. You might see a BNPL offer as a payment choice when you’re checking out online or at a store, and can then apply to finance the purchase. Some BNPL providers also now offer a card that you can use to get preapproved and finance purchases almost anywhere.

There are generally two types of BNPL plans available:

• Pay-in-four plans: These let you split a purchase into four equal payments. You pay the first quarter when you check out and make additional payments every two weeks. There usually aren’t any fees or interest for pay-in-four plans, and your credit score typically won’t affect your offer. Merchants pay the BNPL companies a fee because the BNPL payment plans can increase the store’s sales.
• Installment loans: These are also offered by some BNPL providers. The key difference is that they may accrue interest and have longer repayment terms.

BNPL Pros and Cons

BNPLs can be a great option, but consider these general pros and cons.

Pros

• Fast and free financing: The pay-in-four BNPLs let you quickly finance a purchase without paying any upfront fees or interest.
• Good credit isn’t required: BNPL providers generally don’t consider your credit score for pay-in-four plans.
• Predictable repayments: The pay-in-four and monthly payment options both offer fixed payments with a clear payment schedule and payoff date.

Cons

• Potential late fees: Some BNPL providers charge late fees, although you may receive a grace period or be able to extend or reschedule your next payment if you think you’ll have trouble.
• Can be hard to track and manage: Each of your BNPL plans might have different payment amounts and due dates. It can be hard to keep track of all your payments if you have multiple BNPLs across several providers.
• Could lead to overextension and overdrafts: Even small BNPL payments can add up when you take on multiple loans. You might find yourself deep in debt and could accidentally overdraft your bank account if you set up autopay.

Personal Loan vs. BNPL

With the overviews, pros, and cons in mind, we can take a high-level look at how personal loans usually compare to BNPLs.

When Does a Personal Loan Make More Sense?

A personal loan might make more sense when you want to borrow a lot of money that you’ll use for multiple purchases. Unlike with a BNPL, you can apply once and get approved for a large loan. And although your credit is a factor, you can get prequalified with several lenders and compare your loan offers to find the best one.

Personal loans are also a better option when you’re looking to use the funds for something other than consumer purchases. For example, you can use a personal loan to consolidate higher-rate debt, such as credit card debt, as part of a debt-payoff strategy.

When Does BNPL Make More Sense?

A BNPL might make more sense than a personal loan if you only want to finance a specific purchase. If you can afford to pay off the purchase in four payments, you can avoid financing and interest costs and get a free loan. You may also quickly get approved for financing with a simple application, even if you have poor or no credit.

For larger purchases that you need more time to pay off, you can see how the BNPL’s payment plan compares to the personal loan offers available to you. Consider each option’s monthly payment, repayment term, and the total cost of the financing. A BNPL might wind up being better, but you won’t know if you don’t get several loan offers.

Compare Loan Offers

If you’re looking into a personal loan or a BNPL plan for a large purchase that will require monthly payments, your credit score could be a major factor in your eligibility and offers. Check your credit score for free with an Experian account to see where you’re at. You can also get matched with personal loans from our partners with tools from Experian that will display your available loan offers from multiple partners without hurting your credit score.

At O1ne Mortgage, we understand that choosing the right financing option can be overwhelming. That’s why we’re here to help you navigate through your options and find the best solution for your needs. Whether you’re considering a personal loan or a BNPL plan, our team of experts is ready to assist you. Call us today at 213-732-3074 for any mortgage service needs. Let us help you make the best financial decision for your future.