The problems with Buy Now, Pay Later

Know the risks before you use Klarna, Clearpay and more.

Where to start…. Buy Now Pay Later might seem like an easy and fast way to pay, but there are a number of ways using services like Klarna and Clearpay could be hurting your finances.

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It’s often unclear what you’re agreeing to

A lot of the problems stem from the slick advertising on social media and TV. The brands, particularly Klarna, have represented themselves as a lifestyle choice rather than a loan.

And when you click through to make a payment it’s also often not clear that you’re borrowing money – or of the consequences.

Sometimes it’s not even obvious that you’re signing up for a service or what the terms are, especially when some brands make BNPL the default payment option.

It normalises borrowing

If you don’t really understand how BNPL works, then you might not realise you now have a debt, and won’t view it as one.

This has a huge knock on as it normalises borrowing. Rather than saving up for something and only borrowing in emergencies, you can get it right now.

And you can buy anything this way. Even simple purchases which you don’t need to split in three could be paid or this way, meaning use it for everything and there’s always something you’ll need to pay back.

It’s not always free

The basic services all work under the same principle: you can borrow for free.

But some will levy late charges, which isn’t always clear. These can be between £6 and £12 each time, and though some are capped, they could add up.

And others offer longer-term borrowing with an interest rate charge. Rather than shop around for the most suitable loan or credit card, users might just extend their repayment date or apply for an expensive option instead.

You’ll probably spend more money

The reason BNPL services are free is that the companies charge the retailers instead. And retailers are happy to do this as it’s been shown BNPL encourages us to spend more money. It’s been reported that shopping baskets are 30% larger via these services.

Why’s that? There will be a part where people intend to return some of their items so buy more in a bid to find the items they want to keep. But just because you plan to do this, it doesn’t mean you will.

Perhaps you decide you want to keep more things once you’ve got them in your home. Or perhaps you’re busy and don’t get around to sending things back before the deadline. The end result is you’ve spent more than planned.

But there’s also proof people focus on installment size rather than total due. It’s easier to think you can afford something when the numbers are smaller.

It’s easy to spend more than you can afford

Unlike a credit card you won’t get a set credit limit. There will spending limits per service, so it could be your spending is stopped. In theory this stops unaffordable spending.

But you can then just use a different BNPL service until that too runs out. And again. So you could easily amass large debts.

The problem here is what if you’ve overextended yourself? One or two things might be manageable, but the more you pay for with BNPL, the larger your monthly payments will be.

And if something changes which means you don’t have the cash, you could be faced with late fees or worse. Barclays and StepChange found that one in three users found their BNPL borrowing unmanageable and it lead to problem debt.

According to Citizens Advice, 51% of BNPL users between 18 and 34 have borrowed to pay off. It’s not far off for 35-54 year olds, with 39% doing the same. And 25% have used credit cards to do it.

It’s too easy to get accepted

When you apply to use a BNPL service, a check on your credit report (usually just a soft check) is pretty much all that is taken into account.

So if you have debts elsewhere that mean you can’t afford extra borrowing, they might be ignored. And though that might offer a temporary reprieve, it’ll just make the overall problem worse.

It could damage your credit score

Though most BNPL products don’t require a hard search on your credit file, more and more are reporting usage to the credit reference agencies. This means your debts and repayments will appear to future lenders when they’re deciding whether to lend to you.

So failure to pay a debt back, or doing it late, could hurt your score and make it harder for you to borrow in the future.

They can hurt mortgage applications

Mortgage lenders don’t just look at your credit report – they’ll also assess your spending behaviour using your bank statements. And if they see BNPL on there, they might not view frequent use favourably.

You don’t get Section 75 protection

One of the benefits of using a credit card (and as long as you avoid interest) is that buying something that costs more than £100 will legally put the credit card company in the same position as the retailer if something goes wrong. This is thanks to something called Section 75 of the Consumer Credit Act. You don’t get this with BNPL.

This is also the case if you use a BNPL platform to pay in a single immediate payment as it breaks the direct link between you and the retailer.

Payments might be taken from your linked card

Though you should obviously aim to meet all your payment deadlines, there might be times when you need to prioritise other bills.

But it could be the money is taken from your account automatically. This is because many are paid via the long number on your debit or credit card, known as a Continuous Payment Authority (CPA).

It’s largely unregulated – for now

At the moment most of the BNPL-only brands can do what they want as they’re unregulated. This isn’t great. The only ones which are are those from established finance brands such as Natwest and Monzo.

But plans are in place that hopefully mean the rest will be regulated by the middle of 2023 (it’s been delayed a few times already, so I’m not holding my breath).

This should bring about affordability checks, and the services will need to be approved by FCA and follow stricter rules on advertising.

Customers will also be able to benefit from Section 75 protection and complain to Financial Ombudsmen Service.