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What is buy now pay later?

Buy now pay later: How does it compare to a credit card?

Buy now pay later is a popular payment option at the checkout, allowing you to pay for your purchase in instalments so the full amount isn’t paid until ‘later’. Here’s how buy now pay later works and what’s important to consider...

By Lucy Hancock

Published: 24 June 2021

Young woman using laptop

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What is Buy Now Pay Later (BNPL)?

If you shop online on sites like ASOS or River Island, you may have spotted the option at the checkout to pay for your items in monthly instalments. This type of payment plan is known as buy now pay later (BNPL). It’s a way of buying items on credit, then paying for them ‘later.’

Some buy now pay later providers will let you wait sometimes for a few months to ‘pay later’ for your goods - as the name suggests. While others will give you the option to pay in monthly instalments.

While MoneySuperMarket doesn't offer BNPL, it has become popular among young people as a way to spread the cost when shopping, both online and in store. The service has become so popular that more than nine million Brits have said they’d avoid buying from retailers that don’t offer BNPL as an option at the checkout.*

*According to Finder UK data, March 2021

 

Who are the main BNPL providers?

Klarna, ClearPay and Laybuy are among the biggest providers in the buy now pay later market. According to Finder’s data, Klarna’s app is the most popular with 460,000 active monthly users in July 2020. Paypal also offers a buy now pay later product known as ‘Pay in 3’.

How does BNPL work?

As the name suggests, buy now pay later means you pay for your goods later. The BNPL provider pays the retailer at the point of sale and you agree to pay it back in the future. You usually pay the provider back over a period of time (either a few weeks or months), as a way of spreading the cost. While the cost of what you’re buying won’t be cheaper, it gives you a chance to pay over a longer period of time, which may help you manage your finances.

Is it safe to use BNPL?

Whether buy now pay later is a safe option will depend on your personal, financial circumstances but there are some factors to consider when deciding whether BNPL is right for you.

Unlike a credit card, buy now pay later providers aren’t protected under Section 75 of the Consumer Credit Act. With a credit card, if you buy anything worth between £100 and £30,000 and your order doesn’t arrive or is faulty, you can claim the money back from your card provider. This isn’t the case with BNPL.

It’s important to note that buy now pay later isn’t regulated under the Consumer Credit Act so if something goes wrong you won’t be able to complain to the independent Financial Ombudsman Service – an important layer of protection for consumers. Instead each BNPL provider has its own protection policy in place so check this first when using their service so you know where you stand.

The financial regulator the Financial Conduct Authority has said BNPL providers must pay closer attention to whether a customer can afford to use the product as it has concerns about affordability checks.

Consider your financial situation to decide whether using a buy now pay later service would be a safe option for you or whether you risk getting into debt. If you have a history of bad credit or struggles with debt, using a BNPL service could increase the chance you run into potential money problems if you miss payments further down the line.

Where can I use buy now pay later?

You’re likely to spot buy now pay later as a payment option at the checkout of most online retailers. BNPL provider Klarna lists popular brands including GymShark, ASOS, Boohoo, River Island and PrettyLittleThing, which offer its buy now pay later service. Klarna announced that in the first half of 2020 alone it had added 35,000 new retail partners.

You can often use buy now pay later in shops on the high street as well as online. BNPL provider Laybuy has just introduced a digital card (through an app on your phone) that lets customers spread the cost of their purchase while shopping in store. Laybuy’s new service allows buyers to pay in ‘one tap’ of the digital card, which could start to make buy now pay later a more common way to pay for things in shops. You’ll need to register with Laybuy if you want a card and it will conduct a 'hard credit check' to assess your eligibility and decide your credit or 'spending' limit.

Do I have to pay interest on my purchases?

Buy now pay later is interest free and you shouldn’t be charged any fees – provided you stick to the terms and conditions and pay on time.

The only time you’re likely to end up paying interest is if you don’t meet your repayments on time. So, as long as you keep an eye on when your repayments are due and don’t forget what you’ve spent, buy now pay later is an interest-free option.

That said, there are risks to BNPL. Make sure you know exactly what money you owe and the due date for repayment. If you miss your ‘pay later’ payment, you’re likely to be hit with a late repayment fee, which could be high. Interest and charges can also build up if you continue to miss payments. Ultimately these missed payments can be passed onto debt collection agencies who could also add on fees and charges. So make sure you keep an eye on what money you owe and meet your repayment date on time.

Do BNPL companies conduct a credit check?

Most BNPL companies will perform a ‘soft search’ on you, to verify your address, date of birth and who you bank with. The provider will then give you a credit limit that you’ll have when you use their service. Some BNPL providers may perform a full credit check, but this will depend on the company so it’s important that you check this before you apply.

If you pay in instalments, missed repayments won’t always be reported to the credit reference agencies (CRAs) or show up on your credit report. But if you choose to ‘pay later’ and miss the payment date, this information could be passed to the CRAs and can have a negative impact on your credit score.

Will I have a credit limit when using BNPL?

The buy now pay later provider will typically run a soft credit search on you and then set you a credit limit based on your credit history and affordability.

Your credit limit will be per BNPL provider, not across all providers – so for example you could have a separate credit limit with Klarna and then another limit with ClearPay or Laybuy.

But crucially each provider won’t know what you’ve borrowed elsewhere, so your total debt across multiple buy now pay later providers could add up quickly. This can be risky as different companies can’t see the other providers you may be using at the same time. It's important to keep tabs on everything you owe and where - and most importantly on the key repayment dates.

What happens if I miss a payment?

Try to avoid missing a payment when using BNPL – it can lead to late payment fees and potential high interest charges. Some providers may ask for a settlement fee or interest may be added to the debt you owe.

Your missed payments could be flagged on your credit report and affect your credit score. This could impact on your ability to get other credit in the future, such as a credit card or mortgage.

It may be a good idea to set yourself a reminder on your phone of when your repayment is due, so you don’t end up owing extra money in fees or interest, just because you forgot. If you know you’re going to miss a repayment, it may be best to let your BNPL provider know beforehand. For example, in some cases you could be eligible for a short extension to your due date - if you request it in time. Check any relevant terms and conditions with your provider in advance.

Should I use BNPL or a credit card?

Not sure if you should give buy now pay later a go, or use your credit card? We’ve put together this table to compare BNPL to credit cards:

Features Buy now pay later (BNPL)  Credit card

Payment structure

You’ll usually pay through the provider’s app

Option to set up a direct debit

Interest

No interest as long as you pay back by the end of the repaymentperiod

Interest rates will vary depending on type of card and the APR (0% interest deals are available for those with good credit)

Fees

Potential fee if you miss the repayment date

Fees if you miss a payment or don’t meet the minimum monthly repayment

Affordability assessment

At point of purchase only

Thorough check by lender

Credit building

Won’t improve your score, but won’t affect it negatively if you pay back ontime

Responsible credit card use can improve your score. Credit-builder credit cards can help build your credit rating if it’s low.

Credit limit

You’ll have a spending limit set per provider, usually in the £100s

Decided by the lender based on your credit history and otherfactors

Rewards

Unlikely but depends on the provider

Depending on the credit card you choose you may receive cashback or other incentives

Should I use BNPL or a credit card to buy a TV?

Buy now pay later vs. credit card graphic

What are the alternatives to BNPL?

If you’re looking to spread out the cost of a purchase, whether it’s a TV, a washing machine or a new outfit, buy now pay later may seem like a good option.

Managing your budget by paying in instalments or choosing to ‘pay later’ can work well as long as you hold yourself accountable for paying it back. If you delay your repayments or miss the repayment window, you could end up in a financial mess - with fees racking up which will negatively affect your credit score.

An alternative to buy now pay later is using a credit card as a way of spreading the cost of items or services you want to buy. Unlike BNPL, credit cards come with an extra layer of protection if there’s a problem with your purchase. Under Section 75 of the Consumer Credit Act, if something goes wrong with your purchase (where you’ve spent between £100 and £30,000 on the card) you can claim the money back from your credit card provider.

There is a wide range of different types of credit card to suit different needs. Some cards offer 0% interest on spending for a period of time, others charge higher interest on balances – but may pay cashback or have other perks. Credit cards can also be used to improve your credit rating, showing lenders you’re a responsible borrower, which is useful when applying for a mortgage or other type of loan.

Another alternative to BNPL would be making use of your current account's overdraft, which you can pay back over time. Agreed overdrafts are a quick and convenient way to borrow but be mindful that interest rates can be high if you can't then get back into the black within a reasonable time.

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