“Buy Now, Pay Later” (BNPL) accounts are becoming more common. You’ve probably heard of some of the most popular ones, including Affirm, Afterpay, Klarna, PayPal Pay Later, Sezzle, Splitit, Shop Pay Installments, and Zip.
BNPL loans may seem like a good idea, initially. They allow you to break up a large purchase into smaller, more manageable payments — instead of paying the full cost upfront.
Typically, you make the first payment at checkout and then choose a schedule for the remaining payments, such as bi-monthly or monthly. Most times, the total payment is broken into four installments (known as the “pay-in-four” model).
Usually, these services offer interest-free payments — another advantage of BNPLs. But (and it’s a big “but”), they can slap you with huge fees if you make a late payment. They can also charge you a routine “account maintenance” fee that you may not have anticipated. That’s why it’s always important to read the fine print on these types of financial services.
How Do BNPL Accounts Impact My Mortgage Process?
While BNPL payment methods may seem convenient and harmless, overuse of these services could negatively impact your mortgage approval or even delay your closing.
Whether you’re buying a home soon or want to avoid financial obstacles in the future, here’s how to prevent issues with BNPL accounts:
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Know Your Payment Terms: Understand the length, payment amount, and any potential penalties associated with your BNPL account.
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Monitor Your Payment Obligations: It's not just high balances that can affect your mortgage approval — having multiple BNPL loans with ongoing payments can make an impact, too. Lenders look at total monthly payments and how long they’ll continue, so even several small BNPL accounts can add up.
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Keep Records Handy: Be prepared to provide documentation of your loan agreement, balance, payment amount, and payment history.
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Avoid Opening New Accounts: The fewer open BNPL accounts you have during the mortgage process, the better.
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Consult a Mortgage Professional: Before making any BNPL commitments, reach out to discuss how it may impact your homebuying journey.
How Do BNPL Accounts Impact My Credit Score?
Typically, BNPL services won’t affect your credit score. These types of services do a soft credit check when you sign up to use their payment plans, meaning you won’t get “dinged” on your credit score like you could with a series of hard credit inquiries.
However, it’s important to remember that any type of debt can influence your credit score — especially if you’re late making your payments. Opening too many BNPL accounts and/or missing payments could be detrimental to your credit score.
Plus, the allure of smaller payments could cause you to overspend. Rather than saving until you have the full amount to pay for an item, you may be tempted to splurge when the installment payments give the illusion of spending “less” money.
Also, in most cases, BNPL plans won’t help you build your credit score. Because these institutions don’t report your on-time payments to the three major credit bureaus (Equifax, Experian, and TransUnion), you won’t see any boost in your FICO score from making these installment payments on schedule. But, if you miss a payment, BNPLs could report you to a collections agency — possibly hurting your credit.
The Bottom Line
As with any financial resource or tool, BNPL accounts have their pros and cons. In certain situations, they may be beneficial to use responsibly (just as you would a credit card).
But, if you’re planning to go through the mortgage approval process soon — or even if you simply want to maintain a strong and secure financial standing — you may want to think twice about opening too many BNPL accounts or using them too frequently.
If you have any concerns about BNPLs or other financial decisions that could impact your mortgage process, reach out to one of our qualified loan originators for a complimentary consultation.
The suggestions listed above are intended for informational and educational purposes only and do not constitute legal advice or debt counseling.
