What is Buy Now Pay Later?

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If you’ve shopped online recently, you’ll have probably noticed the option to use Buy Now Pay Later (BNPL) when you go to checkout. So what is Buy Now Pay Later and how does it work? To help give you a better understanding of this service, we’ve run through the pros, cons and what to watch out for in this quick guide.

What is Buy Now Pay Later?

Buy Now Pay Later agreements let you pay for items by spreading the cost across a fixed 0% interest period.

For instance, if you were to buy a £30 t-shirt using a Buy Now Pay Later service that had a three month 0% interest period, you’d pay £10 for three months instead of paying £30 upfront.

There are a number of different Buy Now Pay Later providers, and many have different terms and repayment periods. Industry leader Klarna is arguably the most famous brand, however other Buy Now Pay Later businesses have since entered the market, including Laybuy, Clearpay and Paypal.

With so many different providers out there, it’s essential you know exactly what’s expected from your chosen provider, and how much you’ll need to pay and by when.

How should Buy Now Pay Later work?

Buy Now Pay Later has proved increasingly popular over the last decade. In fact, it’s expected that by 2026, Brits will be spending close to £40 billion a year in this way.

This is because, ultimately, it allows you to spread the cost of your purchases without paying interest. Which, you have to admit, is pretty appealing.  

It also gives you this choice at point of sale, meaning there’s no waiting around for a new 0% purchase card to arrive. You simply use it as you go to pay.

This cost spreading service allows you take advantage of snapping up discounted goods, or simply makes your purchases more manageable by spreading the cost over a few different pay checks. Once you’ve paid for your item in full, the Buy Now Pay Later agreement ends and that’s it. If used correctly, it shouldn’t cost you a penny.

What are the potential risks with Buy Now Pay Later?

If you’re good at managing your money, Buy Now Pay Later can be a useful tool to help you make paying for purchases more manageable. However, there are a few risks with these services that you need to be aware of.

Buy Now Pay Later services are currently unregulated

When you take out a loan or credit card, the lender or credit card provider you choose will be regulated by the Financial Conduct Authority (FCA).

However, with a Buy Now Pay Later service, many of the interest-free products and services are currently unregulated. This means that you can’t make a complaint to the Financial Ombudsmen Service (FOS) if you’re not happy with the Buy Now Pay Later provider.

It can be easy to lose track

As these services tend to be offered as you go to pay, it can be tempting to simply spread the cost of all of your purchases. This could lead to you losing track of what you need to pay, and by when.

Missing payments can result in late fees, and it you’re unable to pay the total cost of the item, you’re often charged interest on your spending. This can result in what was once a small payment costing you more than if you’d paid for the item upfront.

You could be tempted to spend more

If you struggle to stay disciplined with your money or are a bit of an impulse buyer, you may find that you quickly rack up a bill that you can’t afford to pay back down the line.

Going back to our previous example, if you spread the cost of a £30 t-shirt into three £10 monthly payments, you’ll have a bit of money left in your pocket. This might then tempt you to spend more than you had originally intended.

Instead of simply taking advantage of the saved cash for this month, you might decide to make up the difference and buy items so you’re paying £30 a month. In this case, you’ll have actually spent a total of £90, which is a big difference from the initial £30 you were going to spend.

You’ll lose Section 75 protection

When you purchase an item worth over £100 on a credit card, Section 75 laws mean that your item is protected if it is faulty or undelivered. This protection is free and means that you’ll get your money back if this happens.

Buy Now Pay Later isn’t usually covered by Section 75, so if there’s a problem with an item, you may not get a refund.

It’s not recorded on your credit file

When you use a Buy Now Pay Later service, the fact that you’ve potentially taken on additional debt or credit isn’t recorded on your credit file. This is because Buy Now Pay Later companies tend to only use a soft search to check your affordability.

While this is great news in terms of protecting your credit score, not having the Buy Now Pay Later service recorded on your credit file after you’ve actually bought an item on credit means that other companies can’t properly assess your affordability. This means that you could be lent money that you can’t really afford to pay back, which could put you into financial difficulties down the line.

What to do if you get into financial difficulty

If you do get into financial difficulty from using a Buy Now Pay Later service, seek help as soon as possible.

Organisations such as MoneyHelper and StepChange can offer you free, impartial debt advice and will help you work out your options.

While Buy Now Pay Later can be a useful payment method for some, its lack of regulation has put others into difficulty. If you do decide it is the right payment method for you, make sure you have a solid repayment plan in place to avoid incurring any fees or charges.

If you’re looking to spread the cost of your purchases, we can help you quickly and easily check your 0% purchase card options now without harming your credit score.