Buy Now Pay Later (BNPL) is estimated to have over 17 million users in the UK, but what is Buy Now Pay Later? And how can you make sure you’re borrowing well if you use it? In this guide, we explain how BNPL works, including some common misconceptions, to help you decide if, how and when to use it.
Buy Now Pay Later is exactly what it says on the tin. It allows shoppers to spread the cost of purchases either by delaying payment by a set amount of time, or by splitting a purchase into smaller payments. BNPL has become increasingly popular in the UK in recent years, particularly with 18 to 36-year-olds, with the Financial Conduct Authority (FCA) reporting that 25% of BNPL users are 18-24 and 50% are aged 25-36.
There are a number of well-known providers and you will often see retailers offering their services as a means of payment at checkout, but it’s also possible to approach a provider directly. There are some specific differences though between BNPL and other Point of Sale finance.
Most consumer credit lending is regulated by the Financial Conduct Authority (FCA), with some falling directly under the remit of the Consumer Credit Act 1974. However, there has been an exemption to regulation in place since the Act was passed into law to allow a time-limited, interest-free delay to payment for goods and services. That means many Buy Now Pay Later services are not currently regulated, though both the UK Government and FCA are currently looking more closely at this.
According to Citizen’s Advice, 40% of BNPL users think that it’s not ‘proper’ borrowing and 41% of users struggle to make repayments. But, if you are using Buy Now Pay Later, you are still entering into a credit agreement, and you have to meet your repayments. So, as with all borrowing, it’s important to make sure you understand the details.
Most BNPL schemes offer 0% interest, however, there are sometimes other costs associated with using their services, such as an application fee or late payment fees. While the providers typically make their money charging retailers a fee for the service, there are certain products which can charge you, the borrower, so make sure you know how much you might pay for the credit you take out, before doing so.
The table below provides a breakdown of five popular BNPL providers in the UK and their associated fees (information correct as of 7th December 2021) for reference. This table is intended to provide a snapshot comparison of different BNPL providers, but please refer to their websites for the full terms and conditions of each product or service.
Missing repayments, for any form of credit, is likely to negatively impact your credit score and possibly even your ability to take out further credit in the future. Lenders also usually charge fees for missed payments or late payments and these vary according to the lender. If you’re unsure what those fees are, you should refer to the lender’s own terms and conditions.
In some cases, and for multiple missed payments, you may also risk being referred to a debt collection agency and the lender may pursue you through the courts for unpaid bills. This could potentially leave you with a County Court Judgement (CCJ) which will affect your credit file and your ability to take out further credit in the future.
Buy Now Pay Later can be useful when it comes to spreading the cost of purchases, however, it’s essential to keep up with payments as it is still a form of borrowing and you’re taking out a credit agreement by using the service. That means your credit score could be affected if you don’t keep up with repayments, so it’s vital to ensure you can afford them when they are due.
As BNPL is not currently regulated in the way other forms of credit are, BNPL providers do not need to make the same checks as traditional lenders, though some are putting measures in place voluntarily. For example, when you apply for a credit card or loan, the provider has to perform a number of checks to make sure that the product is affordable for you. But with BNPL, it’s your responsibility to make sure you can afford the repayments alongside any other commitments you have. Think about whether you have other commitments coming up and how you will pay for them, or whether you are likely to have as much income coming in or left when the payment is due. This may be especially important if you get paid weekly and bills are monthly, or vice versa.
Credit limits are generally set at low amounts for BNPL but, as they don’t need to perform the same checks as other regulated providers, you may find that you’re able to borrow from multiple providers at once, thus increasing the amount you can borrow overall. As such, it could be very easy to suddenly find yourself with repayments you aren’t able to manage if you don’t keep track of the amounts you’ve borrowed, and from where.
Plus, it is widely reported that when people use BNPL, on average, they spend 20-30% more (and some BNPL providers report more than that). iSmash’s Chief Operating Officer has claimed that ‘the average basket size on Klarna is twice that of other payment methods’ amongst their customers, indicating that the option to delay the payment could be leading to consumers spending more than they otherwise might. With that in mind, it's not surprising that BNPL is now being promoted by some retailers on each product and search ads to tempt you into buying.
So not only do you need to make sure you can afford it, it’s worth thinking about how the availability of BNPL affects your shopping choices. If you are using the availability of credit to try on more items or more sizes, without having to pay just yet, this can be very convenient if you return unwanted items and bring yourself back within your budget before being charged. However, it may also mean you don’t return as much as you thought you might, and so you may be spending more than you intended.
Our research report ‘Borrower confidence, capability and stress: Is the UK borrowing well?’ found that over a third (43%) of UK borrowers aged 25-34 typically feel guilt or regret when buying something with credit, with this number jumping to over two thirds for those aged 18-24. Similarly, around a third (31%) of 25-34 year olds buy on credit and worry about how to pay for it later, with this number increasing to almost three quarters (70%) amongst 18-24 year olds. As we have seen, these age groups are also the primary users of BNPL services, with 18-36 year olds making up 75% of users. With that in mind, it’s really important to make sure you know exactly what you’re dealing with when taking out new borrowing, whether using BNPL or other products, to avoid paying more in interest and fees, or carrying debt for longer than you need or intended to.
As Buy Now Pay Later is a form of credit, the usual borrow well tips apply. Follow the steps below to make sure you’re totally in control of your borrowing, regardless of how it is that you’re paying for something.
Knowing your debt is incredibly important when considering using Buy Now Pay Later services, or taking out any new credit for that matter. Make a list of all your debts, look at your incomings and outgoings, and understand what you are paying and when. Make sure you’re not paying more in interest than you need to, for example, by using an app like ilumoni, as any money you can save on interest is more money in your pocket.
By knowing your debt inside out, you’ll be in a stronger position to confidently decide how much additional debt you’re willing to take on.
After you’ve looked at your debt, take a look at your outgoings and see how much you can realistically afford on any additional repayments. If you get paid weekly or fortnightly, make sure you account for outgoings that happen monthly and the weeks when they’ll fall. Once you’ve determined how much you can afford to repay and when, you can use this to create a budget for yourself. This can inform any purchasing decisions that you might otherwise have used BNPL for, and help you stay on track with your spending.
Whenever you’re spending, whether that’s presents or treats for yourself, it’s a good idea to set yourself a budget for each item. This way you can determine which items you can pay for outright, and which items you would prefer to repay using a Buy Now Pay Later service or other forms of credit, if needed.
Compare the items on your list across multiple sites and shops to make sure you get the best deal for you, as different online shops may have the same items at different prices. You may also find that items are cheaper in-store too.
If you find that additional spending will leave you overstretched, or struggling to keep up with repayments within the time frame of the agreement, they might not be worth it.
If, after researching your shopping list and getting under the skin of your existing debt, you would prefer to use credit to pay for some of your items, it’s important to consider all the borrowing options available to you.
There are many different options for Buy Now Pay Later services, for example, and by having a look at each of the options you’re offered, you can find the one that is the best fit for you. This could be a delayed payment, or splitting the total into instalments, depending on what would suit your needs best.
Many providers offer 0% interest offers for some of their services, but not for others, so remember to check if you’ll be paying interest on your payments before you commit to an option.
Other options can also help spread the cost, such as 0% interest credit cards. These could offer longer periods of interest-free spending, which means you could pay less in interest in the long run, and you may be able to break your purchases down to smaller chunks and still pay off the balance without accruing interest.
So you have your plan and your list, next up is making sure you stick to that plan! Once you’ve taken out new credit (whether through BNPL or another product) make a note of when the payments are due so you don’t miss them, as missed payments can affect both your credit score and your financial future.
By following the steps above, and taking the time to get to know your current financial commitments and circumstances, you’ll be in a much better position to decide whether any new borrowing is right for you, be it Buy Now Pay Later or something else, or if you’d be better to avoid taking on additional debt.
If you're concerned or anxious about your finances or are struggling with debt, the organisations on our Debt Helplines page can offer you additional support or advice.
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