When is a personal loan better than buy now pay later?

What would you do if you really needed to buy something but didn’t have enough money in your bank account? If Afterpay springs to mind, you’re not alone. This service – along with the many other interest-free finance options on the market – has helped buy now, pay later (BNPL) schemes go mainstream.

The concept seems simple; a store offers the BNPL service that allows you to purchase what you want immediately (subject to certain approval criteria.) You’re then required to set up regular payments via a credit or debit card until the debt is repaid. It certainly sounds easy, especially if you’re good at keeping track of your finances and budgeting, but what if you’re not? And what if you have the tendency of impulse buying?

Be aware that BNPL services will charge late payment fees if your payment doesn’t go through, plus you can be declined if you have too many outstanding orders. Alternatively, you may be asked to make additional payments before you can be considered for approval again.

On top of these considerations, there are also times when Afterpay, Zip Pay and other buy now, pay later schemes may not fit with your goals. What happens if they can’t approve the amount you need or you’re juggling a few different expenses?

One option you could consider is getting a personal loan.  A personal loan offers finance to help with all types of personal needs and allows you to pay it back in instalments over a set period of time. While personal loans may have interest charges or fees, they can offer you more flexibility when it comes to the amount of money you borrow, where you spend it and how long you want to pay it off.

Here’s a look at three situations when it’s worth considering the benefits of a personal loan before a BNPL service.

1. Debt consolidation

If you’re juggling debts already, using a BNPL scheme to finance a new purchase is only going to add to your bills. It also won’t help you pay off your existing debts and any interest charges that apply to them.

On the other hand, a personal loan gives you a way to consolidate your debts so that you only have to deal with one repayment and one set of costs. This can help while you pay off the balance and is less stressful than managing a bunch of different accounts. Depending on the finance option you choose, you could also get access to funds to pay for any purchases you were considering to make through a BNPL scheme.

1. Large expenses and events

The spending caps or restrictions on some BNPL schemes can be a challenge when you want to finance more expensive purchases.

For example, Zip Pay offers a maximum limit of $1,000 whilst Afterpay doesn’t list specific limits for shoppers but says that you need to have at least 25% of the purchase price available in your account. This can limit your options when you’re paying for big-ticket items and/or when you’re planning a big holiday, wedding or other event.

In comparison, personal loans can offer limits from around $2,000 up to $10,000 and more, depending on the lender and your circumstances. Personal loans also offer longer repayment options, with loan periods up to 3 years and longer. This can help you pay off larger expenses at a reasonable rate, while still giving you the convenience of instalment payments.

1. Building your credit

If you ever want to buy a home, get a new car or finance a huge wedding, it’s important to establish your credit history and build up a good credit score. This is because lenders use your credit history and credit score to help decide if you’re eligible for a loan or other form of credit.

When it comes to establishing and building credit, most BNPL schemes won’t update information to your credit file. In fact, unless you are asked and agree to a credit check, the details of the account may not even show up on your credit file. There is also a chance a BNPL account could drag your credit score down, as a default could be listed on your file if you don’t meet your repayment requirements.

On the flip side, a personal loan paid out in full and on time means lenders are more likely to look favourably on your future loan applications, as this adds positive history to your credit report and can help improve your credit score. It’s worth noting that there are other types of accounts and options for building credit history. So, if that’s your goal, make sure you ask any potential lenders what details they add to your credit history before you apply for finance.

The bottom line here is that there is a wide range of different ways you can finance purchases and major expenses. So, before you jump in, take the time to compare the finance products available to you, so that you can find one that best suits your budget and goals.

By: Amy Bradney-George – Finder.com