Buy Now, Pay Later can be a convenient way to split the cost of purchases over time, but could it cause more problems in the long run? Find out more in our quick guide to Buy Now, Pay Later offers
What is Buy Now, Pay Later?
Buy Now, Pay Later (BNPL) is a type of short-term finance that lets you spread the cost of a purchase over time. BNPL offers are also sometimes known as Point of Sale (POS) instalment loans.
While some BNPL options are offered directly from retailers, most will partner with a third-party provider instead. Some of the most well-known BNPL providers include Klarna, Clearpay, and Laybuy, but other finance companies are also starting to enter this market with the likes of PayPal and Monzo getting in on the action. If you’ve ever used buy now, pay later, you’re not alone. In the UK, Klarna currently has over eight million customers and works with over 6,000 retailers.
How does Buy Now, Pay Later work?
When you use Buy Now, Pay Later to make a purchase, instead of paying the full purchase price when you’re at the till or checking out online, the BNPL provider will pay the retailer for you. You’ll then be responsible for paying the provider back over the next few weeks or months (depending on the terms of your agreement).
While BNPL is most associated with online shopping, it’s becoming increasingly common for this to be a payment option when shopping in-store too.
Using BNPL will not normally make the things you’re buying any cheaper, but they can make it easier to manage your finances and stick to a budget by giving you more time to pay.
There are two main types of BNPL repayment plans, either:
- The purchase price will be repaid in instalments due either every week, fortnight, or month. An initial payment may also be taken on the purchase date.
or
- The full purchase price will be repaid in one go after a fixed interest-free period e.g., 30 days later.
Some retailers only work with one BNPL provider, which could limit your options. However, if you make your payments on time, you won’t have to worry about paying any charges or fees. Instead, the BNPL provider will charge the retailer directly.
Am I eligible for Buy Now, Pay Later?
Each BNPL provider has different eligibility criteria that they consider, but it’s generally believed that it’s easier to qualify for a BNPL like Klarna or Clearpay than other types of finance.
Typically, your eligibility for Buy Now, Pay Later will be based on your credit rating and affordability. These factors will also be used to determine the credit limit set by the BNPL provider. Everyone can have a different credit limit, and this may increase over time if you prove to be a responsible borrower.
How does Buy Now, Pay Later affect my credit score?
The effect of Buy Now, Pay Later on your credit score depends on the provider you have and how you manage your repayments. Currently, most BNPL providers won’t carry out a hard search on your credit report to assess your eligibility; instead, they’ll conduct a soft search that won’t be visible to other lenders. Having too many hard searches on your credit report in a short time can negatively impact your credit score, so opting for BNPL might not affect your score as much as a new credit card or personal loan would.
If you keep up with your repayments, BNPL might not have any impact on your credit score. However, if you fall behind or miss payments, it could be a different story. Not all BNPL providers report missed payments to the three credit reference agencies, but it’s worth keeping in mind that these could leave a mark on your credit report and impact your ability to secure credit in the future.
What are the pros and cons of using Buy Now, Pay Later?
When used responsibly, Buy Now, Pay Later can be a great way to manage your budget. Splitting a purchase into smaller repayments could make it more affordable or prevent you from going into your overdraft if you need to make an emergency purchase but don’t have spare funds available to pay for it.
BNPL can also be useful if you think you might return a purchase. Depending on the terms of your agreement – for example, if payments don’t need to be made before 30 days have elapsed – you might be able to make a purchase, change your mind, and return it before any money leaves your account. Even so, it’s important that you do keep making payments on returned items until the returns process is complete.
Unfortunately, BNPL can also make it easy to overspend. If you don’t have a repayment plan in place, you could end up spending beyond your means and struggle to make the payments or end up in your overdraft when the repayments are taken.
Shopping with BNPL also means missing out on some consumer protections. The industry is not currently regulated (although this may change soon) and so you can’t complain to the Financial Ombudsman. You also won’t be covered by Section 75 Consumer Protection. This normally applies to all credit card purchases and protects you when making purchases over £100 that aren’t delivered or are faulty.
What happens if I miss my Buy Now, Pay Later repayments?
Depending on the Buy Now, Pay Later provider you use, your repayments will either be taken automatically, or you’ll receive a notification when payment is due. Most will also send you a reminder a few days before each payment date so that you can make sure you have the money in your account to cover it.
However, if you don’t have the funds available or forget to pay, you could be charged a repayment fee. This might be fixed fee or a percentage of your balance. These late payments could also affect your credit score if the BNPL provider reports them to the credit reference agencies. And if you fail to pay, your debt might even be passed over to a debt collection agency and further action could be taken against you.
What are the alternatives to Buy Now, Pay Later?
If Buy Now, Pay Later isn’t the right option for you, you may be better off applying for a 0% APR balance transfer credit card or entering an approved overdraft. Both options are regulated by the Financial Conduct Authority (FCA), which means more stringent checks will take place and you have the right to complain to the Financial Ombudsman if something goes wrong. You’ll also have Section 75 protection when spending on a credit card.
Some banks and building societies are also entering the BNPL industry and offer a middle-ground between the unregulated industry and the more formal processes of traditional financial services. Monzo Flex, for example, allows customers to split purchases into three instalments over three months interest-free, but requires a hard credit search and is regulated by the FCA.
If you’re struggling with your Buy Now, Pay Later repayments, our friendly team of experts is here to help. Get in touch by calling 0161 8260 585 or send us a message here
