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Buy now pay later vs personal loan
Thinking about making a pricey purchase but don’t want to splash all your cash at once? Buy now pay later (BNPL) and personal loans are two alternatives to traditional credit cards that also allow you to secure the goods you’re after without paying for every cent upfront.
How does buy now, pay later work?
As the name suggests, BNPL lets you buy something now and pay for it later, in a series of instalments. Generally, you’ll need to make a portion of the payment at the time of purchase before paying the rest later.
To get going with BNPL, you need to create an account with one of the over 20 BNPL providers in Australia, enter the relevant details and wait for approval. Once you’ve been given the green light to use a particular platform, you can make payments at any of their approved retailers, either in-store or online.
These participating retailers can be extremely varied, ranging from clothing and beauty to furniture and appliances. Whatever type of product you want to buy, you should be able to find a BNPL service with retailers to match.
How does a personal loan work?
A personal loan allows you to borrow a specific amount of money from a lender to pay for something - often big life events such as buying a car, consolidating debts, home renovations, holidays, or a wedding. You then need to repay the money you borrowed, plus interest, over an agreed period of time (called ‘the term’).
Each lender should clearly outline their terms for what their personal loan can and can’t be used for, so you can quickly work out if it meets your needs.
Buy now pay later vs personal loan - how do they compare?
Now that you know the basics of BNPL and personal loans, let’s dig a little deeper and discuss what sets them apart.
The biggest difference between these two financial products is how the funds are distributed. With BNPL, the provider directly pays the merchant on your behalf; whereas with a personal loan, the lender deposits the funds directly into your bank account for you to use.
The next point of difference between BNPL and personal loans is the amount of funds you can access. BNPL allowances can range from hundreds of dollars to the low tens of thousands, whereas personal loans can go all the way up to the high tens of thousands. Which financial product you go for therefore depends on how much money you need.
Both BNPL and personal loans require you to make a steady stream of instalments either weekly, fortnightly or monthly over an agreed time, to pay back what you owe. With BNPL, you’re paying the provider back the money they paid to the merchant; whereas with personal loans, you’re paying the lender back the money they loaned you.
When it comes to repayment terms, BNPL’s terms are typically much shorter (usually just a few weeks or months) compared to personal loans (usually one to seven years).
A lot of BNPL providers offer plans with zero interest but there are some that will start adding interest to your repayments after a certain period of time.
With personal loans, interest is inevitable. The interest that’s tied to the loan can be fixed or variable and secured or unsecured, depending on the lender and the loan. Additionally, your interest rate may also be influenced by personal circumstances, such as your credit score.
The majority of BNPL providers allow you to make early repayments, additional repayments and pay out your balance early at no extra cost - so you can pay off what you owe sooner.
A lot of personal loans have these same features, albeit they usually come with fees. Some personal loans also offer what BNPL platforms don’t - a redraw facility where you access the additional repayments you’ve made if you’re in need of some extra funds.
Fees are a given when it comes to these financial products.
BNPL has a variety that you may have to fork out, depending on the provider, including late repayment fees, establishment fees, management or account-keeping fees, and dishonour fees if you have insufficient funds in your account at the time of your scheduled payment.
Personal loans may have upfront, ongoing and late repayment fees, as well as fees to use certain features (as mentioned above).
Each BNPL has different eligibility requirements, but the common ones include being over 18, an Australian citizen or permanent resident, and having a valid and verifiable email address and mobile number. Depending on which provider you go with, you may need to be employed in some capacity, earn a certain amount of income per week, and have a good credit history to back you up.
Personal loans tend to have more eligibility requirements on top of these, including having no defaults to your name and not being bankrupt or having a court judgement.
Applying for a BNPL service can be as simple as creating an account on a provider’s website or app, but getting an on-the-spot approval may no longer be possible. With the BNPL industry soon coming under the fold of the National Consumer Credit Protection Act, it’ll become mandatory for BNPL service providers to conduct thorough credit checks on new borrowers and align with responsible lending practices. Still, the process of applying for a BNPL service is likely to remain simple compared to applying for a personal loan.
To secure a personal loan, you generally need to produce a multitude of documents, undergo a credit check (this wasn’t always required by BNPL providers in the past) and sign paperwork; you should also be prepared for a bit of back and forth with the lender as part of the process.
Also, bear in mind - while using a BNPL platform may not directly impact your credit score, any hard inquiry made can still reflect on your credit report. Additionally, having outstanding BNPL debts may make lenders hesitant to approve your loan application.
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Product data updated on 24 Dec 2024
