Difference between BNPL and LTO

Since 2020, alternative financing options have become more popular among consumers, offering consumers budget flexibility and convenience. In fact, between 2019 and 2021, the number of BNPL loans issued to consumers increased by almost tenfold.¹

Two popular options are split-pay, buy now, pay later, (BNPL) financing and lease-to-own. In this article, “BNPL” refers to a “split-pay” loan where a customer splits the cost of a purchase into, typically, 4-6 equal weekly payments, at 0% interest. While both options give consumers ways to acquire goods without paying the full amount upfront, they operate differently and cater to distinct consumer needs. In this article, we'll explain the differences between the two pay-over-time methods, and how they work together as complementary solutions to drive more business results.

About split-pay, BNPL, financing

Split-pay, BNPL, installment loans allow consumers to make low to medium-sized purchases and spread the cost over several installments without interest. The amount the customer owes is divided into equal payments, often over a few weeks.

Key features

1. Short-term, fixed, interest-free payments: With split-pay (e.g., “pay in 4”) BNPL financing, customers pay off a 0% interest loan in equal amounts over 2-6 weeks.

2. Lower-ticket purchases: The average BNPL loan amount is around $135, with credit limits typically between $100 to $1,000².

3. Wide credit spectrum: Consumers across the credit spectrum utilize BNPL loans. Many BNPL providers do not have a minimum credit score requirement, however, the average credit score of BNPL users falls within the subprime range (scores between 580-669)².

4. Cost to the merchant: Merchants typically pay the BNPL provider a fee for each purchase that is typically comprised of a fixed amount plus a percentage of the purchase value.

About lease-to-own financing

Lease-to-own, also known as rent-to-own, enables consumers to shop with a participating merchant and pay for an item over time, in fixed rental payments to a financing provider. Instead of interest, the customer pays a rental fee on top of the retail cost. Unlike BNPL, lease-to-own agreements often extend over longer durations, typically ranging from months up to two years.

Key features

1. Flexible ownership options: With a lease-to-own agreement, the customer gets to use the item, while renting it from the financing provider. The customer typically pays a rental fee based on the retail price. The customer has the option to purchase the item from the provider early to save on financing costs. Since this is a rental agreement, the customer can initiate a voluntary return if they no longer want to use or rent the item.

2. Cover higher-ticket items: Since lease-to-own agreements can often extend up to 12 to 24 months, they can cover higher ticket purchases. Lease amounts typically range from $200 to $7,500, with the average lease amount around $1,250.

3. No cost to the merchant: In most cases, merchants do not have to pay a fee to offer lease-to-own financing to their customers

4. No credit required: Customers do not have to have a credit score to get approved for a lease product. However many lease-to-own providers still perform a hard credit check when the customer signs their lease agreement.

5. Some product restrictions: Not all items are leasable, and the requirements vary by state. Typically, if an item is returnable, for personal or household use, it is likely leasable. Items such as furniture, mattresses, appliances, tires, wheels, and personal electronics are a great fit for leasing.

How BNPL and lease-to-own financing work together as complementary solutions

When it comes to financing, retailers don’t have to choose between BNPL or lease-to-own financing, but can instead offer both to cater to distinct customer needs.

• By providing BNPL plans, retailers can attract budget-conscious shoppers of all credit types who are looking for short-term, interest-free payment plans on lower-ticket items.

• Simultaneously, offering lease-to-own expands a retailer's customer reach to no-credit to near-prime consumers seeking longer-term payment solutions for important, higher-ticket items.

Retailers who expand their financing menu can better meet the financing needs of their customers, ultimately driving sales and fostering customer loyalty.

¹Martin Kleinbard, Jack Sollows and Laura Udis, “Buy Now, Pay Later: Market Trends and Consumer Impacts,” Consumer Financial Protection Bureau, September 2022

²Cortnie Shupe, Greta Li, and Scott Fulford, “Consumer Use of Buy Now, Pay Later: Insights from the CFPB Making Ends Meet Survey,” Consumer Financial Protection Bureau, March 2023