When you scratch the surface, online loans and Buy Now, Pay Later (BNPL) financing may seem identical. They both help you afford something you can’t out of pocket, and you pay them back in fixed payments over time.

Dig a little deeper, however, and you’ll find out they’re two distinct financial products with different purposes in your finances. Let’s shine the spotlight on them today to help you understand your options.

What is an Online Loan?

An online loan is typically a small-dollar, short-term, unsecured installment loan. What this mouthful means in plain English is simple:

• Your approved loan amount won’t be very large, with most lenders capping funds at $10,000.
• The timeline to repay what you owe could take years, but not decades. Most options set it up so that you pay your loan back in fixed monthly payments.
• You won’t have to guarantee your loan with a valuable asset; instead, online lenders assess your creditworthiness by reviewing your financial situation, which may include your pay schedule and credit score.

As with any borrowing option, online loans apply interest and finance charges. Most lenders bundle these costs into your fixed payments.

An online loan can come from the typical bank you keep a checking account with, or it can come from online direct lenders.

Online direct lenders are financial institutions that fund your loan (if approved) without involving other companies, like brokers or loan matching services. Still wondering how do online direct lenders work? You can spend some time clicking that link.

Most online direct lenders make their loans available for emergencies. They provide a safety net when you need extra help covering an urgent, unavoidable repair or expense.

What is Buy Now, Pay Later Financing?

BNPL financing is a point-of-sale loan that lets you purchase an item without paying for it in one lump sum. Instead, you’ll pay a small portion of the item upfront and agree to pay rest over time with fixed payments.

Point-of-sale loans are unsecured, as you won’t have to put down an asset to be approved. You’ll just have to fill out an application to show you meet the BNPL service’s requirements.

Up to this point, BNPL financing may sound like the typical online loan because of its fixed payment schedule. However, that’s where their similarities end.

BNPL financing is offered by middleman FinTech services hired by the online store where you’re shopping. These FinTech services pay for your item, so you’ll owe them, not the store.

They also don’t put any limitations on what items apply to BNPL. While direct lenders are for emergencies, BNPL services are for big-ticket items you want to buy, such as electronics, jewelry, or clothes.

Many BNPL financing options don’t apply interest or finance charges. But that isn’t the case for all of them. Some charge fees for expensive items or longer repayment terms.

The Takeaway:

Put simply, BNPL financing may be an option when you’re shopping for everyday items and gifts. It’s a way of getting an item right away while paying for it over time. According to Juniper Research, over 900 million people will use this financing by 2027.

An online loan, on the other hand, is a financial safety net when you need help in an emergency. They’re ideal for urgent expenses, such as car repairs, household repairs, or medical tests.