With more of us doing more shopping online – begrudgingly or enthusiastically – you’ll no doubt have seen adverts shouting “Buy Now, Pay Later”. Is this just the store credit of yesteryear, repackaged for a new generation?
There are similarities between buy now, pay later – known as BNPL – and interest-free credit that was all the rage through DFS sofa sales and the Littlewoods catalogue. It works a little differently now, although the concept is broadly similar.
To help you understand how it works and decide if it’s suitable for you and your finances, we’re going to answer some of your common questions about BNPL, such as:
- How does buy now, pay later work?
- How will BNPL affect my finances?
- Is BNPL a good idea?
- Why has BNPL been in the news recently?
How does buy now, pay later work?
Do you remember the days of endless sales on sofas? Sunday never came, and the credit was always interest-free. If you ever furnished your home with DFS – other brands were available – you'll have an idea of how interest-free credit works.
BNPL uses the same model, but if you’re not sure what on Earth it all is, here’s what happens:
- You choose what you want to buy, usually online.
- At the checkout, you'll be offered options to use BNPL companies.
- Payment options include paying in 3-6 instalments or the full amount in 14 or 30 days.
- The BNPL company will pay the retailer upfront for you.
- You give your debit or credit card details to the company that will take your payments.
When you do this for the first time, you’ll start an account with the company the retailer partners with. You get a limit on how much you can owe them at any time, usually a few hundred pounds.
What companies do BNPL?
A few big companies dominate the industry. Klarna works with over 8,000 retailers whilst the other two big players, Clearpay and Laybuy, work with hundreds each.
PayPal, the online payments behemoth, has recently launched "Pay in 3," which works with the same concept. They pay the retailer then take the money off you in three instalments, or "slices," as they now tend to get called.
How do BNPL companies make a profit?
You, the customer, don’t actually pay anything extra to these companies. Instead, they get paid from the retailer you buy from, somewhere around 2-8% of your purchase price.
They also make money when you miss payments. Each company has different models, but generally, if you miss a payment, you'll be charged £6-£12 with that being added to your outstanding balance—more on this in a moment.
A missed payment is when there wasn't enough money in your bank account for the company to process your payment.
How will BNPL affect my finances?
Unless you're a fan of Polonius and live by "neither a borrower nor lender be," BNPL isn't inherently a bad thing. It can be useful when you get your wages or pension weekly but need to buy new clothes or replace your washing machine.
As long as you’re good at budgeting and keeping track of when your money is coming and going, you should be able to manage. The golden rule is simple – don’t borrow more than you can afford to pay back.
However, there are some potential pitfalls to the BNPL model:
- Depending on the credit check done, you might get lots of BNPL usage recorded on your credit file, which can be potentially detrimental.
- Although you may have reasonable limits with one company, having accounts with two or three BNPL companies could lead to debts in the low thousands.
- If you miss payments, you can end up paying fees and having interest applied to your borrowing, causing a snowball effect of unmanageable debt.
- BNPL providers can also sell on your unsettled debt to debt collection agencies which can be a worrying experience.
If you find yourself getting into difficulties managing your BNPL payments, contact StepChange, who can offer counselling and advice.
Are there other pitfalls of BNPL to be aware of?
Savvy shoppers know that putting a purchase of over £100 on a credit card gets you Section 75 consumer protection. This means your credit card company is liable for faults or problems with whatever you buy.
When you do BNPL, you're not buying the item; you're buying the services of Klarna, Clearpay, or Laybuy. Say you buy a new pair of trainers for £120 that fall apart after one jog. If you buy with a credit card, your provider is liable to refund you, whereas if you use BNPL, you’ve got no protection.
Is BNPL a good idea?
BNPL can be a useful tool in your arsenal of payment options, along with credit cards, overdrafts, and good old savings. It's a good idea for people who know what's what with their finances and can plan their expenses effectively.
Prone to overspending? Got an unstable income? You may find it harder to manage the card payments coming out of your account, sometimes without a reminder.
Why has BNPL been in the news recently?
BNPL is a short-term borrowing solution. It's not currently regulated by the Financial Conduct Authority (FCA), which means you can't take complaints to the Financial Ombudsman.
This is now set to change, with the government announcing that BNPL companies will fall under the FCA's remit. This will mean the companies have to do thorough affordability checks and have policies to protect vulnerable customers.
What you need to know about buy now, pay later
In days gone by, you'd know BNPL as store finance or interest-free credit. The overarching concept is still the same, with modern world tweaks that have made it accessible to the younger generation.
When you need to make a big purchase quickly and don't want to go down the credit card and overdraft route, BNPL can be a useful option. Be cautious about becoming reliant on the offer, and be sure that you can manage your ins and outs, so you don't get unstuck with charges.