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When you’re out shopping, you may see an item you really, really love but don’t want to spend the full amount right away. Buying on credit means that you can make that purchase immediately but pay off the full amount later, typically with a cost that is called “interest”.
Buying on credit offers many benefits. It can lessen the burden on your wallet and help you access the items you want now without having to pay a lump sum. It can also help improve your creditworthiness if you are able to demonstrate responsible use of the credit with timely and complete payments.
Still, it’s important to understand the risks of buying on credit, such as fees, interest, and potentially spending beyond your means. You are also incurring debt that may accumulate with interest and fees, which could lead to the inability to make the payments and a damaged credit score.
With a variety of ways to buy on credit and factors that determine its fees, limits, and more, it’s important to know the ins and outs. Here are some below.
Buying on credit has come in many different forms over the years. In fact, buying on credit as we know it started in the early 1900s, when General Motors offered installment plans to help car buyers finance their big purchases.1
Today, while customers may be accustomed to traditional credit options like credit cards, new solutions like buy now, pay later loans have emerged and evolved to make buying on credit even more accessible.
You can use a credit card to make purchases by tapping into a revolving line of credit. Each time you make a purchase, your credit line reduces. When you make a payment, your credit line goes back up. If you pay back the entire amount that you have borrowed in a given month, you will not be charged interest. Otherwise, you will be charged interest on whatever amount that you carry over to the next month.
Credit cards can be easier to use than cash, though they may come with high interest rates and fees. As with any spending option, it’s important to only use it within your financial means as the associated interest and fees related to credit can add up quickly.
Credit cards might also offer bonus perks, rewards, and points, which you can put toward future purchases. There are also cashback credit cards — such as the PayPal Cashback Mastercard® — that can give you cash back on your purchases made with the credit card.
Buy now, pay later (BNPL) is an increasingly popular way to buy on credit online. With BNPL, you can checkout immediately but pay over time — often at low or no interest rates — for a shorter duration. Unlike credit cards though, with a BNPL loan, the amount that you borrow is fixed, and once you pay it off, you cannot use it anymore.
Buy now, pay later solutions and payments have grown exponentially. According to the Consumer Financial Protection Bureau, the number of BNPL loans increased 970% across the top five lenders from 2019 to 2021.2 And Juniper Research expects BNPL spend to grow from $112 billion in 2022 to $437 billion by 2027.3
Why is BNPL so popular? Because it often comes with low or no interest rates, no fees, and sometimes, no impact on your credit score.
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Buying on credit can help you build your credit score and make shopping easier. Still, it’s important to understand one of the biggest risks associated with credit solutions: fees.
Credit cards can come with many different types of fees, including annual fees, late payment fees, foreign transaction fees, and fees for spending over your credit limit. So even if you’re splitting up your payments over time and making your minimum monthly payments, you may incur extra costs in the process.
BNPL vendors may charge late fees, but many offer payment plans with no fees at all. With PayPal’s Pay in 44, for example, you can check out and split your purchase into four interest-free payments — no late fees involved.
Both BNPL solutions and credit cards can come with interest. But the size of those interest charges can depend on many factors. Credit card issuers, for example, may set interest rates based on your credit score, payment history, and unpaid balances. Other providers may use different criteria, so it is wise to review a credit issuer’s terms when applying for a form of credit.
Regardless of your preferred credit solution, it’s always important to thoroughly research and understand your options and make on-time payments when buying on credit.
Learn more about PayPal’s cards and credit services here.
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