Buy now pay later (BNPL) programs have become increasingly popular in the last several years. It seems like there are dozens of these point-of-sale installment loans being made available to customers, and PayPal is no different, thanks to its Pay in 4 offering.
If you’ve never used this type of payment method before, you may be wondering, does PayPal Pay in 4 build credit, and is it a good idea to use it? In this article, we’ll break down what PayPal Pay in 4 has to offer and why you’re ultimately better off avoiding these checkout financing options.
How does PayPal Pay in 4 work?
PayPal actually offers two buy-now-pay-later payment options to individuals with a PayPal account: Pay in 4 and Pay Monthly. Both options are available for online purchases with major retailers such as Best Buy, The Home Depot, Walmart, and Target.
Both programs provide purchase protection on eligible purchases, and neither option comes with any sign-up fees or late fees. However, there are significant differences you should be aware of.
Pay in 4
PayPal Pay in 4 is available for purchases ranging from $30 to $1,500. It allows users to split purchases into four interest-free payments. Similar to other BNPL programs, Pay in 4 requires a down payment that’s equivalent to one-fourth of the total purchase price. After this, you make three interest-free payments every two weeks until the full amount is paid off.
Pay in 4 repayments can be made using a linked credit card, debit card or bank account. However, users can’t use their existing PayPal balance to make repayments. The repayments are withdrawn automatically from the linked account. Users can’t pause or suspend payments, but they can log on to the PayPal app to make extra payments in advance (or completely pay off the purchase).
Pay Monthly
The Pay Monthly option allows you to finance a larger purchase amount, but if you’re hoping for a no interest loan, you’re out of luck. Pay Monthly charges interest, with an APR interest rate ranging from 9.99% to 29.99%. Loan agreements are available in terms of six, 12 or 24 months.
Monthly payments begin one month after the retailer processes your purchases. In this case, there’s no down payment at the time of purchase, but the purchase is split into six to 24 equal payments that include the cost of the original purchase plus applicable interest charges. Credit cards cannot be used for Pay Monthly repayment, but debit cards and bank accounts can.
So, does PayPal Pay in 4 build credit?
No, the PayPal Pay in 4 program won’t help you build your credit.
When you apply to use Pay in 4, PayPal does a soft credit check to determine whether to loan to you, although the company doesn’t have a stated minimum credit score to qualify. Soft credit checks don’t affect your credit score and allow for a quick answer when you’re completing online checkout.
In addition, Pay in 4 purchases aren’t reported to credit bureaus, so your on-time payments won't build your score.
But Pay in 4 can indirectly affect your credit score — both positively and negatively — if you’re charging repayments to your credit card. When you make on-time payments on your credit card, you’ll build your credit by positively influencing your credit payment history.
However, when you use your credit card for Pay in 4, those charges will increase your credit card balance and credit utilization ratio, which could have a negative effect on your finances or credit score.
First, as your credit card balance increases, you’ll accrue increased interest charges if you can’t pay your balance in full by the due date.
Second, your credit utilization ratio affects the amount-owed credit score factor. If your Pay in 4 repayment charges increase your credit card balance in relation to your credit limit, the higher credit utilization could negatively impact your credit score.
The PayPal Pay Monthly program, on the other hand, has a more direct impact on your credit score. The Pay Monthly plan is reported to credit bureaus roughly 30 to 60 days after the loan was originated. This report will include the status of your loan and your payment history (including late and missed payments).
So, while Pay in 4 won’t show up on your credit report, information about any Pay Monthly loans you’ve taken out with PayPal can affect your credit score for better or worse. The Pay Monthly loan temporarily increases your credit mix and making on-time payments can help strengthen your credit score over the life of the loan. However, missed or late payments will be reported to the credit bureaus, potentially hurting your credit score.
Why you should avoid BNPL programs
While PayPal Pay in 4 and Pay Monthly may seem convenient, they and other BNPL programs have several potential pitfalls that could leave you worse off financially.
The biggest issue with Pay in 4 and other BNPL programs like Klarna, Afterpay and Affirm is that they can entice you to spend more than you can actually afford. PayPal lets users take out multiple Pay Monthly loans at the same time. It may seem great to finance several purchases this way, but taking out too many loans at once can stretch your budget to the breaking point. This is especially true if interest charges in a Pay Monthly loan end up being more than expected.
Because PayPal uses automatic withdrawals for repayment, you could also experience issues with your linked accounts. For example, if PayPal tried to withdraw money from your linked checking account but your account balance was too low to complete the payment, you might get hit with an overdraft fee from your bank. Similarly, if your credit card is already near the credit limit, the repayment may not be able to get processed.
In short, BNPL programs run the risk of leaving you with extra monthly (or bi-weekly) payments that you can’t truly afford on top of your normal expenses.
Finally, it’s also worth noting that PayPal Pay in 4 isn’t available in U.S. territories or the states of Missouri, Nevada, New Mexico or North Dakota. Pay Monthly isn’t available in Alaska, Colorado, Hawaii, Maine, Massachusetts, Nebraska, Nevada, New Hampshire, New York, South Dakota, Texas or Vermont.
Instead of using Pay in 4 or other similar payment plans, you’d be better off setting aside a little money each month until you can afford to make your desired purchase in full. Even something as simple as setting aside $20 from each paycheck will let you gradually save up enough money to pay in full without incurring extra debt and the potential pitfalls that come along with it.
Find better ways to pay
While BNPL services may seem like a great way to help you finance a purchase, they are better off avoided. While PayPal Pay in 4 doesn’t build credit, the Pay Monthly program could potentially help or hurt your credit score. Both programs have the potential to harm your financial standing if you overextend yourself by financing too many purchases. This could even increase your credit card debt if you’re not careful.
If credit card debt has become difficult to manage, Tally† may be able to help. Tally allows you to combine higher-interest credit card debts into a single lower-interest line of credit, helping you pay off your debt faster and put more breathing room into your budget.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.
