Make sure you understand how it works.
Buy Now, Pay Later continues to get more and more popular. It’s practically impossible to visit an online retailer and not see adverts encouraging you to use the service to shop.
Which people do. One in three people in the UK have used it to buy something, according to Barclays and StepChange. And not just once. At any time they’ll owe an average of £250 across 4.8 purchases.
And it’s going to keep growing. By the end of 2022, it’s expected that it’ll account for a quarter of all sales on platforms that allow it. It’s not just via brands like Klarna and Clearpay either, as established financial institutions like Barclays, PayPal and Monzo all now offer it as a way to pay.
But just because you can use it, should you? I’ve taken a look at the benefits and risks associated with BNPL.
What is BNPL?
Buy Now Pay Later, or BNPL, is at its most basic the ability to delay or spread out your spending, usually without any charges or interest. You can do this because you’re taking out credit that is used to pay the merchant. You then owe the BNPL firm the cash you’ve borrowed.
This isn’t anything new – you’ve possibly used financing for big purchases such as a sofa, car or kitchen, or maybe used a 0% purchase credit card or catalogue credit. But “BNPL” is really used when we’re talking about short-term borrowing.
In the main BNPL schemes, which this article will focus on, you’ll usually choose between a couple of options.
One is repaying in a month with no upfront payment. The other is splitting it over two or three months in equal installments that start at the time of purchase and can be weekly, fortnightly or monthly.
This is how the likes of Klarna, Clearpay, PayPal and Laybuy work, as do newer offerings from big banks such as Natwest, Monzo and Virgin Money. But there are huge variations in how they work so make sure you read the details before you apply.
Is it OK to use Buy Now, Pay Later?
There are a few reasons why people use a BNPL service. Some make more sense than others when it comes to your finances. Here are the key ones:
You can spread out the cost
BNPL allows you to split the cost out over time, whether a single month or longer. Great when there’s an emergency or something expensive you need to buy but you don’t have savings.
Of course, these types of purchases aren’t always why people use this feature. Plenty use it just as a matter of habit, even for everyday and non-essential purchases. I’ve seen it as an option for a can of beer and pack of sweets.
One danger is you’ll overextend yourself and lose track of what you are still paying for month after month. Or if there’s a change in your income or expenses, you might find these purchases are no longer affordable.
Verdict: Only in emergencies or large expenses you can budget for
It’s a free way to borrow
With most, there are no charges if you clear your payments on time. That means it’s interest-free and fee-free.
Surely there’s a catch? Well rather than charge you, the BNPL firms make a profit by charging the retailers. You might think that’s odd, but it’s been proven we’ll spend more money when using BNPL – either because we intend to return some of the items we buy, or because we look at the partial payment size rather than the total when working out if it’s affordable.
But it’s only free if you make all your payments on time. If you miss any, some will charge late fees. There’s also the possibility that debt collectors could be called in for non-payment, which could lead to a county court judgment. That’s bad news for your credit report.
Watch out too for longer splits, perhaps up to a year. These won’t be free as they’ll come with interest charges that probably won’t be the cheapest ways to borrow and will be subject to a hard credit check.
Verdict: It’s only free if you make your repayments
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It’s an easy way to borrow
The often limited credit and affordability checks when you apply mean those who can’t get credit elsewhere will be able to borrow money via BNPL.
That can be handy for those with a thin or poor credit report, especially in an emergency. But it’s bad news for those already struggling with debts.
Citizens Advice found that of BNPL users who had missed or made a late payment, more than half had been refused a credit card or other BNPL product in the last year. So getting more “easy” credit just makes the matter worse.
And with more BNPL firms now reporting payments to the credit reference agencies, missed and defaulted payments could also hurt your chances when applying for other lending.
Verdict: If you already have unmanageable debts then look for free debt help instead
It’s a quick way to pay
People often choose BNPL as it’s the default way to pay (sometime retailers do this), and if you’ve got an account it can be fast too. Though entering card details into a website is hardly a chore.
But when you’re doing this, it’s not always made clear how it works and that you’re signing up for a credit aggreement. Citizens Advice research found out of 38 retailers, none mentioned that you could be referred to a debt collector – the information was hidden in a separate terms and conditions page.
Verdict: It’s just as easy to use a different payment option
You can return unwanted items before you’ve paid for them
Shopping online, particularly for clothing, can mean you buy multiple styles and sizes in the hope that one will be the right fit. But it can take a while for your returns to be processed and refund sent back to your bank.
So BNPL allows you to ship back some or all of the clothes before you’ve paid for them, meaning you’ll only pay for what you keep.
Except, you still need to take those packages back to the courier or Post Office. And whether it’s because life gets in the way or you decide actually you would like to keep more than you intended, this doesn’t always happen.
And even if you do send things back, there’s the risk that the return won’t be processed before your payment is due.
Verdict: Just make sure you do return everything you don’t need
You might get rewards or offers
I’ve seen discounts, free delivery and voucher codes offered at checkout for using BNPL. Elsewhere some companies offer cashback and one offers fee-free spending overseas.
I’d expect this to be a real growth area, and if you manage the BNPL purchase well it’s not that different from using a cashback credit card.
Verdict: As long as you manage the repayments, they could be worth a look
How to use BNPL
There are a few different ways you can access BNPL services. The most common is at an online checkout, where you’ll often see one or a choice of BNPL options, along with traditional methods such as a credit or debit card and digital wallets such as Apple or Google Pay.
There are also services that offer a BNPL card, sometimes physical but often digital (which can be added to your phone’s wallet). These work like a credit card in that you can just use them to pay if the card is accepted, whether that’s online or in-store.
Or you might be able to generate a QR code which can used in participating stores to send the payment to your account.
There won’t be a set credit limit, but there might be a spending limit. These often start off quite small when you first join up, but could increase as time goes on.
How to get BNPL
You’ll either be able to apply at the checkout when paying, or you might need to apply in advance – it depends on the service.
There are usually very lax affordability checks made to assess if it’s a suitable way for you to borrow. You might just need to fill in your name and address.
Most of the time it’ll just be a soft credit check, though hard checks are likely for BNPL provided by the banks.
With most services you’ll be able to choose how you want to “pay later”. It could be that the whole payment is delayed by a month, or you might pay some now, and the rest in weekly or montly installments.
Watch out for longer-term repayment options as these could well come with full credit searches and interest payments.
How to pay the money back
Again, they all work differently. Some set up with a Continuous Payment Authority (CPA) where money is taken automatically via the long number on your debit or credit card. It’s best not to use a credit card – you’ll get charged interest if you don’t clear the balance.
Others let you make payments manually or set up a Direct Debit. The latter is a better option as it’ll mean you don’t forget to pay – though you’ll need to make sure there’s enough cash in your current account to cover the payment.
You can set up notifications ahead of a payment coming out with most providers, though I wouldn’t rely on it – especially if you have multiple BNPL accounts with money coming out at different times.
It’s better to add reminders to your calendar. I’d also keep track of what you owe in BNPL on a weekly basis to make sure you don’t overextend yourself.
If you find you’re struggling to make those repayments, then prioritise the ones with late fees.
Should you use BNPL?
My main concern with BNPL is how easy it is to put purchase after purchase on it, so you’ll end up with a sizable repayment due every month. And if circumstances change, this could mean you can’t afford the debt and get hit with late fees or damage your credit report.
So the first thing to ask is why are you using BNPL? If you have the money in your bank (and you don’t need it for essential bills), then it’s almost always better to use this and only borrow at a later date if you really need to.
If you can’t afford it now, then really consider if you need it. And if you do need it, do you need it now? It’s going to be better for your bank balance if you save and wait.
But if waiting isn’t going to work, then just be sure you can make the split repayments. Take a look at your budget to ensure there’s enough wiggle room for unexpected costs.
I do get the argument for BNPL when you’re ordering multiple sizes or variations – just remember to return what you don’t keep.
It’s also worth thinking about alternatives. Perhaps a 0% purchase credit card or overdraft are better and could give yo longer to pay off an expensive purchase. And if it costs more than £100 and your BNPL provider doesn’t offer Section 75 protection, a credit card will be better.
And though a handful of BNPL cards do offer cashback, for those that don’t you’ll likely be better off with a cashback debit or credit card.