Both personal loans and BNPL help you pay off a big-ticket purchase over time, but they operate differently. Let’s take a closer look at where they overlap and how they differ from each other.
Purpose
Personal loans provide a lump sum of money upfront that you can use to meet a big financial goal, such as 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
Common personal loan terms span three to five years, though you might find terms as short as one year or as long as seven years. BNPL repayment terms will vary, too, but tend to be shorter than personal loan ones. As mentioned above, Affirm offers a maximum term of 12 months at Target. PayPal’s BNPL service, known as PayPal Pay in 4, gives you six weeks to pay off your item.
Generally speaking, you’ll have more time to repay a personal loan and less time with BNPL.
Interest and Fees
Many BNPL programs don’t charge any 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 10% to 30% APR for orders over $100 at Target.
Personal loans come with interest charges, which are assigned based on your credit. Some lenders offer rates starting around 6% APR to creditworthy borrowers. 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.
Application Process
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.
Applying for a personal loan, on the other hand, is more time-consuming. Many lenders let you check your rates online with a soft credit check. But if you want to move forward with a loan, you’ll need to 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 couple of business days for the lender to process your application and transfer funds into your bank account.
Loan Amount
The amount you can finance with a BNPL service will vary. Going back to the Affirm example at Target, it’s available for items starting at $100 up to $15,000.
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 offer up to $100,000.
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. As mentioned, 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 score, according to myFICO.com, so keeping up with payments can have a positive effect in the long run. 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.
