BNPL vs Instalment Loans: Which Is Better for Your Finances?
BNPL (Buy Now Pay Later) is suitable for small purchases with interest-free repayments if managed responsibly, while instalment loans are suitable for large purchases with structured repayment plans.
Both BNPL and instalment loans are popular among consumers as they spread the cost, but they differ in structure. Caution is enjoined when using these options. This blog discusses both financing options with their upsides and downsides, and also reveals which one is better.
What is BNPL (Buy Now Pay Later)?
BNPL is a type of financing that enables you to make a purchase when cash is tight. You pay later for goods purchased now in fixed instalments over a period of a few weeks.
BNPL generally splits payments into four equal parts. Each instalment becomes due every two weeks.
The widespread adoption of this credit facility can be attributed to its interest-free structure. They are particularly useful for buying clothes, footwear and paying utility bills.
Here are the features of BNPL:
- You do not have to pay the full price of a bought item outright. BNPL will enable you to spread the cost of the purchase over weeks and months.
- It is interest-free credit. However, late payment fees will be imposed in case of default. It does not cost a penny if payments are managed responsibly.
- Repayments are generally once a week or fortnight.
- Not all BNPL providers report your payments and defaults to credit reference agencies, but missed payments are still not advisable, as you will be rejected for future credit.
- BNPL does not involve a hard check, so you will not lose your credit points.
Pros and cons of BNPL
| Upsides | Downsides |
| Funds are accessible without paying anything upfront. | Late payment fees will be levied if you miss payments. This increases the total cost. |
| No good credit score is required. There is no risk of losing your credit score as well. | Small payments quickly add up if you excessively rely on BNPL. Chances are you find yourself deep in debt. |
| Payments are predictable. You can plan around payments to avoid falling behind on them. | Multiple BNPLs are hard to track as each BNPL plan offers different payment amounts and due dates. |
BNPL is the most affordable way to borrow, but it is still a debt. Before you sign up for BNPL, ask the following questions:
- Is it urgent to purchase this item? If you can put it off, do not buy now.
- Are you certain about your repayment capacity?
Long-term BNPL is also available
Some BNPL providers also enable you to make large purchases and spread the cost over months, but they work differently from regular BNPL.
- In case of a purchase of big-ticket items, the repayment plan will be between six months and two years.
- Each payment will go towards the purchase price and interest. Long-term BNPL is not interest-free.
- You will undergo hard credit checks, which will result in a temporary loss of credit points.
- Missed payments or late payments will not only charge interest penalties and late payment fees, but they will also damage your credit score.
What is an instalment loan?
An instalment loan is a personal loan which allows you to meet large expenses when you are running out of cash. Depending on the borrowed sum, repayment plans may last for up to five years.
- When you apply for personal loans in the UK from direct lenders, an affordability check is made. It includes a perusal of your credit report and current financial standing.
- A hard check will leave search footprints on your credit report, which can be seen by other lenders, too. They will temporarily lower your credit score, but it bounces back as soon as you start making payments.
- Subprime borrowers are also eligible for these loans, but lenders will restrict the loan amount as they charge high interest rates.
- Instalment loans charge fixed interest rates, so monthly payments will remain unchanged throughout the repayment term.
- On-time payments and defaults will be reported to credit reference agencies. Personal loans can make or break your credit score.
Benefits and drawbacks of personal loans
| Advantages | Disadvantages |
| Interest rates and repayment terms will remain fixed, so you know how much to pay down and how long. | Interest starts accruing as money is disbursed. In case you miss a payment, you will face interest penalties and late payment fees. |
| It does not require collateral, even if you are taking out instalment loans for bad credit. There is no risk of losing your asset in case of default. | Personal loans are subject to processing fees. Apart from that, they also charge early repayment fees if you settle the debt before the time. |
| You can use the money however you want. These loans can be used for emergencies as well as planned expenses. | Lower interest rates are available only to those whose credit reports are up to scratch. |
Personal loans vs BNPL
| Aspects | Personal loans | BNPL |
| Loan amount | A large amount depending on your creditworthiness and lender’s policy | Up to the price of a product you are buying |
| Use of funds | You can use it for anything | Only for a specific purchase |
| Convenience | Approval takes a couple of days | Instant approval if it is a small BNPL. |
| Fees | Processing fees | Only late payment fees if you miss the due date |
| Interest rates | Yes | Not for small BNPL, but long-term BNPL charges interest rates |
| Repayment | Fixed monthly payments | Fixed payments every 15 days or monthly |
The verdict
BNPL makes sense when you need funds instantly for small purchases. They are interest-free. However, if you are already a 0% credit card holder, try using them as they are regulated, unlike BNPL.
Some lenders provide small emergency loans as well, which are suitable for small purchases, but these loans charge interest rates and are paid off in one fell swoop.
Personal loans make sense when you need to borrow a large sum of money. Though there are some long-term BNPL providers, they charge higher interest rates than personal loans. You can use instalment loans for a variety of expenses, but BNPL is aimed at only a specific purchase.
So, before you choose between them, understand your credit score, needs and affordability.
Paul Smith is an established financial author and writer with over nine years of experience, who specialises in personal finance, loans, credit management, and investment strategies for people throughout the UK. Paul’s expertise can be seen on leading loan websites such as Bargainloans. Through his blogs and articles Paul has helped thousands of borrowers make wiser financial decisions while his passion for study encourages people to take control of their finances with greater confidence and clarity
