Buy now, pay later (BNPL) is becoming a popular payment alternative to credit cards, layaway plans, and rent-to-own plans. An estimated 60% of Americans have used a “Buy Now, Pay Later” service at least once to make purchases online or in a store.

Rent-to-own, on the other hand, has become an $8.5 billion industry, focused primarily on big-ticket purchases like furniture, appliances and electronics. When comparing buy now, pay later and rent to own, here are some key differences to keep in mind.

What is Buy Now, Pay Later?

Buy now, pay later refers to a type of short-term financing that allows consumers to pay for purchases in installments and usually without interest. With one of these point-of-sale loans, buyers make a deposit against their purchases, then repay the remaining balance in three or more installments spread over time.

There are a number of platforms that offer buy now, pay later loans, including:

Each of these platforms partners with a variety of major retailers to offer buy now, pay later as a payment option at checkout. Common purchases include clothing, electronics, furniture, appliances, housewares and cosmetics.

No credit check is typically required to qualify for a point-of-sale installment loan, which can make this short-term financing option attractive to people with limited credit history. Another common feature of BNPL services is the fact that they may have no interest or fees on purchases.

What is rent to own?

Rent-to-own is an arrangement in which consumers make payments for items with the goal of eventually owning them. This is similar to how a rental contract with option to purchase or hire purchase to buy a house works.

There are a number of stores that specialize in rent-to-own financing, including Rent-A-Center and Aaron’s Rent to Own. They allow people to purchase items and then pay for them over time, often with:

• No credit check
• Quick approval
• Low minimum deposits
• Weekly, bi-weekly or monthly payments
• Payment plans tailored to everyone budgets

With rent-to-own contracts, consumers do not borrow money. Instead, they agree to pay rent payments on one or more items for a specific period of time. If they make all scheduled payments in full, the item becomes theirs. But they can also choose to stop payments and return the item to the store.

Rent-to-own plans may require a deposit to get started, although this can be as little as $1, depending on the store or supplier. Many stores also offer free delivery and installation of appliances, furniture and other large items.

Buy now, pay later Advantages and disadvantages

Benefits

BNPL funding can offer distinct benefits to consumers who use these services. These include:

• Being able to receive items now and pay for them over time
• Flexible payment options
• No credit check to qualify
• Flexible spending limits
• No interest fees on purchases (usually)

All of these elements can make BNPL attractive, especially to consumers who may have limited credit history.

Contrary to layaway planswhich require you to pay in full before receiving the items you purchase, buy now, pay later plans allow you to take possession of your purchases after you make your first payment.

Disadvantages

Overspending is one of the biggest drawbacks of using BNPL plans. Among consumers who use the point of sale installment loansthe average balance owed is $883. Fifty-seven percent of shoppers who use BNPL say they regretted making a purchase because the item was too expensive. So while these services can be convenient, there is a price to pay for buyers who end up spending too much.

Buy now, pay later can also be problematic if the buyer can’t keep up with their payments. The platforms that offer these loans may charge late fees for missed payments. In the worst case, they can report borrowers to credit bureauswhich can harm your credit score.

Advantages and disadvantages of renting with the option to buy

Benefits

Just like a BNPL plan, you can usually get what you pay for the same day you sign up for a rent-to-own plan, meaning you don’t have to wait to make the final payment. It is therefore possible to be approved the same day and leave with the items in hand.

Qualifying for rent-to-own financing can be easy if there is no credit check or if a rent-to-own store accepts buyers with bad credit.

Lease-to-own payments can be flexible and tailored to your budget. For example, stores may offer weekly, bi-weekly, or monthly payment plans. You could have 12, 18 or 24 months to repay your purchases.

Disadvantages

The biggest disadvantage of renting to own is its cost. Hire purchase is a rental transaction and not a credit transaction. In other words, it is not a readyso there is no interest to pay. But rent-to-own stores may add rental or rental fees to the cost of your items.

This may make any item purchased on a rent-to-own basis more expensive than it would be if you were using BNPL or another payment method. The total cost you will pay for an item purchased on a rent-to-own basis must be disclosed in your lease or rental agreement. However, these documents can sometimes be confusing and difficult to read, so it may be necessary to do a little digging to understand the true cost of the items.

Some rent-to-own locations offer what they call the cash option. This allows you to pay only the store’s cash price for an item, plus applicable taxes. However, this store’s cash price may be higher than what you might find elsewhere.

The essentials

Compared to rent-to-own agreements, buy now, pay later can be more transparent in terms of how much you can spend and how much you’ll pay for whatever you buy. But rent-to-own can give you more time to pay.

When choosing between either payment option, consider how affordable the payments are and what you’ll pay in total after including any fees or other charges. Read on the better buy now, pay later to decide which ones might be right for you. Also consider the benefits of using a credit card with rewards pay instead if you want to earn miles, points or cash back on your purchases.