What’s the Difference Between Afterpay and a Signature Loan?

April 26, 2024 by Partner Colorado Credit Union

Afterpay has become popular over the past few years because it conveniently lets you divide up payments for things you buy online. You may be wondering how Afterpay is different from a more traditional loan, like a signature loan. Let’s take a look at each option and break down the key differences between Afterpay and a signature loan.

How Does Afterpay Work?

Afterpay is a buy now, pay later (BNPL) service that allows you to make purchases and pay for them later in four equal, interest-free installments. Afterpay is only available at partner retailers that have agreed to take this payment method. You can download the Afterpay app to manage your payments and track your spending.

How Does a Signature Loan Work?

A signature loan, also known as a personal loan, is a traditional installment loan offered by financial institutions like a credit union. A signature loan lets you borrow a lump sum of money to pay for whatever you need. You pay the loan back in fixed monthly payments, which typically have terms ranging from two to seven years.

Key Differences between Afterpay and a Signature Loan

Now that you have a better understanding of how Afterpay and a signature loan each work, here’s a closer look at the main differences between the two options.

Payment Structure
Afterpay divides the overall cost of your purchase into four separate payments. Each payment usually comes due every two weeks. Signature loans, on the other hand, have fixed monthly payments over a specific term, which can range anywhere from one to seven years.

Signature loans give you the flexibility to choose how you use the funds. You can use a signature loan to consolidate debt, cover unexpected expenses, or make a significant purchase.

Interest Charges
Afterpay doesn't charge interest on purchases if payments are made on time, whereas a signature loan has a fixed interest rate applied to the entire loan amount throughout the life of the loan. Even though Afterpay does not charge interest, it’s important to note that it can impose late fees if a payment is missed or not paid on time. You want to make sure you can make all the payments on time before making your purchase to avoid extra fees.

A signature loan is unsecured, meaning it doesn't require collateral like a car or house. Afterpay doesn't involve collateral either, but it is limited to being used at partner retailers.

Approval Process
Afterpay provides instant approval at the point of sale, making it convenient for quick purchases without a traditional credit check.

Signature loans involve a more comprehensive approval process. There’s typically a credit check required during the application process. Approval is typically based on the borrower's creditworthiness, income and financial history. The better your credit history, the better chance you have of getting better loan terms.

The decision between Afterpay and a signature loan depends on the specific circumstances of your financial situation and the purpose of the funds. If you need a larger amount, prefer a fixed interest rate, and are comfortable with a more structured repayment plan, a signature loan may be the better option. If you're making a smaller purchase and value the convenience of interest-free installments with a shorter payment schedule, Afterpay might be more suitable. Always consider the terms, fees, and potential impact on your budget before making your decision.