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You can borrow money with personal loans and buy now, pay later (BNPL) plans. But figuring out which type of financing will be best often comes down to what you plan to buy, the loan offers available to you and your ability to repay the loan. In general, a personal loan may be best for very large or multi-purchase events, and BNPLs could be better for one-off purchases or if you have poor credit.
What Is a Personal Loan?
A personal loan is a type of unsecured installment loan that allows you to borrow money and repay it with fixed monthly payments. Many personal loans share common features:
- You receive the entire loan amount at once.
- The loan has a fixed interest rate and set repayment period, which means 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 you'll want to consider the pros and cons and compare your loan offers to a BNPL.
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. Although 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 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 are also offered by some BNPL providers. The key difference is that they may accrue interest and have longer repayment terms.
BNPLs can offer an easy financing option for individual purchases. There often isn't a hard credit check for the pay-in-four plans. However, you only receive financing for the individual purchase and your eligibility will be reassessed every time you want to use another BNPL plan.
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.
| Personal Loan vs. BNPL | ||
|---|---|---|
| Personal Loan | BNPL | |
| Loan amount | Potentially tens of thousands, depending on the lender and your creditworthiness | Up to the price of the product or service you're buying |
| Use of funds | Almost anything | Only for the specific purchase |
| Convenience | Apply online or at a branch and get the loan within a few business days | Instant approval and financing at the time of purchase |
| Fees | May have an origination fee | No upfront fees |
| Charges interest | Yes | Not for pay-in-four plans, but yes for monthly plans |
| Repayment | Fixed monthly payments | Fixed payments every two weeks or monthly |
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 Experian CreditMatch™, a free service that will display your available loan offers from multiple partners without hurting your credit score.