Personal loans and buy now, pay later loans allow you to cover expenses you might otherwise not be able to afford – and then repay what you borrow over time. But there are key differences between the two payment options to consider:
| Personal loans | BNPL | |
| Purpose | To cover emergency expenses, consolidate debt, or pay for large expenses like weddings, home renovations, and medical bills | To pay for large purchases like appliances, electronics, and furniture when you need them now but don’t have the funds |
| Repayment terms | Typically three to seven years, though some go as long as 12 years | Typically a few weeks to a year |
| Interest and fees | Potential for origination fees; interest rates range from 6% to 36% | Potential for late fees; no interest rates in some instances, though it varies by purchase |
| Application process | More time-consuming and requires a hard credit check for approval | Soft credit check only, often performed at point-of-sale; takes only minutes to get approved |
| Loan amount | Varies by lender but could go from $1,000 to $100,000 | Typically between $50 and $1,000 |
| Impact on credit | Need better credit to qualify; potential to improve (or hurt) your credit over time | Could hurt your credit if you miss payments |
Purpose
Personal loans provide a lump sum of money upfront that you can use to meet a substantial financial goal, like consolidating debt, renovating your kitchen, or paying for a wedding.
BNPL programs, on the other hand, come in handy when you’re shopping for a pricey item, such as furniture, electronics, or a new mattress, and want to spread out the payment over four or more payments.
Repayment terms
Generally speaking, you’ll have more time to repay a personal loan and less time with BNPL. Common personal loan terms span three to five years, though you might find terms as short as one year or as long as 12 years.
BNPL repayment terms will vary, too, but tend to be shorter than personal loan ones. For instance, BNPL company Affirm typically has loans that last three, six, or 12 months7, while PayPal’s Pay in 4 program gives you just six weeks to pay off your item.8
Interest and fees
Personal loans come with interest charges, which are assigned based on your credit. Some lenders offer lower interest rates, around 6% APR, to creditworthy borrowers, but borrowers with bad credit should expect high interest rates. On a personal loan, your rate is typically fixed over the life of the loan. Some lenders also charge an origination fee, which is a percentage of your loan amount that they may deduct from the amount you borrow.
Many BNPL programs don’t charge interest or fees as long as you stick to your repayment schedule. That said, some start to charge interest if you opt for a longer repayment term or a pricier item. For example, PayPal Pay in 4 doesn’t charge any interest, while Affirm charges an interest rate if you need more than four payments or purchase an expensive item.
Application process
Applying for a personal loan is more time-consuming. than applying for BNPL Many lenders let you check your rates online with a soft credit check. But if you want to move forward with a loan, you must submit a complete application.
Applying usually involves uploading documentation, such as pay stubs, and allowing a hard credit inquiry, which can temporarily ding your credit. You may have to wait a few business days for the lender to process your application and transfer funds into your bank account.
On the other hand, BNPL has a straightforward application process that only takes a minute or two. If your retailer offers it, you can choose BNPL at checkout. After a soft credit check, you’ll instantly see whether you’re approved.
Loan amount
When it comes to personal loans, you usually have to borrow a minimum of $1,000 or $2,000. Some lenders let you borrow up to $35,000, some max out at $50,000, and others may offer up to $100,000.
The amount you can finance with a BNPL service will vary, but according to the Consumer Financial Protection Bureau (CFPB), the typical pay-in-four structure lets you borrow up to $1,000.9
Impact on credit
A personal loan tends to impact your credit more than BNPL. You usually need decent credit to qualify for a personal loan in the first place. A personal loan lender will run a hard credit check when processing your application, which can knock a few points off your score. Once funded, your loan could increase your debt-to-income ratio.
It’s not all bad, though. Making on-time payments on a personal loan can help build your score. Payment history makes up 35% of a FICO® credit score, so keeping up with payments can have a positive effect in the long run.10,11 Late payments, however, will drag down your score.
As for BNPL, you don’t necessarily need high credit to qualify. A lender will only run a soft credit check, which won’t hurt your credit. However, BNPL programs may not report your on-time payments to the credit bureaus, so fulfilling your BNPL agreement may not help build your credit. On the flip side, a BNPL provider might report late payments, so be careful not to miss any.
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