The ins and outs of buy now pay later

We’ve written this handy guide to give you all the information you need when it comes to buy now pay later (BNPL) schemes.

What is buy now pay later?

Buy now pay later is a relatively new (and popular) form of payment online. It’s fairly similar to a credit card in the sense of rather than paying the upfront cost of something, you can choose to spread the cost over a few weeks/months, or even delay the full payment until a later date. It doesn’t make what you’re buying any cheaper, it just simply gives you more time to pay it off.

The biggest buy now pay later brands currently in the UK are Klarna, Clearpay, Laybuy and Afterpay. PayPal and Monzo have now launched their own buy now pay later products too, in the form of ‘PayPal Pay in 3’ and ‘Monzo Flex’.

Is buy now pay later expensive?

One of the main points buy now pay later firms focus on to get you to use their service is that it’s interest and fee free so, in theory, it shouldn’t cost you anything to use. However, what they don’t openly advertise is that they do charge late payment fees and, because they’re set up in a way that encourages people to overspend, it’s very easy to fall into a trap where you can’t afford the repayments and end up getting charged. This not only means you’ll end up paying more for the item you bought, but it can also negatively affect your credit score which may impact your ability to borrow money in the future (e.g. when you’re looking to buy a house) - so if you are planning to use a buy now pay later scheme, make sure you have a realistic plan for how you’ll meet the repayments on time.

Why is buy now pay later a problem?

It's easy to think of buy now pay later schemes as a harmless way of spreading your costs out over time, but the hidden dangers aren't often spoken about. Unlike other credit products, many buy now pay later schemes are currently unregulated. Although this is set to change, BNPL companies currently aren’t facing enough checks, so they are able to act in a way that doesn’t have your best interests at heart.

With clever design that plays on our psychology to encourage us to spend more, they trick us into becoming a different kind of consumer. The consistent nudging to become someone that spends more than they have results in identifying as someone that has more money than they actually do. There’s a danger of spending more on the unnecessary and having less than you thought for the necessary purchases, especially as inflation has reduced the buying power of our money and sent prices for essentials skyrocketing.

This is all backed up by our own research too. We found that 87% of people think BNPL encourages them to live a life they can’t afford, with 81% concerned their online spending could lead to long term debt in the near future (see our campaign against BNPL for more on this).

So, while using BNPL isn’t a problem as long as it's used responsibly, you do need to make sure you don’t get carried away and can keep up with the repayments on time. Also, check the fine print for hidden fees and interest that might get you in trouble down the road.

Can you use buy now pay later in shops or just online?

When buy now pay later was first launched, it was an online only payment method. However, in January this year, Klarna announced it was launching a physical buy now pay later card that you can use anywhere that accepts Visa as a payment method, meaning you can now use the service in stores too.

You might think this sounds a lot like a credit card...and you wouldn’t be wrong. However, there are some differences. Whenever you use the Klarna card (either online or in store), you won’t benefit from Section 75 protection like you do with traditional credit cards and you also need to pay off the entire balance within 30 days, meaning it’s important you use it responsibly and can afford to repay everything you spend. If you can’t, you could face a visit from a debt collection agency.

Section 75 protection means your credit provider is jointly liable if anything goes wrong with your purchase – so if a company goes bust and you don’t receive your item, you can make a claim with your credit provider to get your money back.

As a company, we don’t recommend using the Klarna card because of the potential dangers it can pose. It’s another step to normalising not being able to afford what you buy, which can lead people to long term debt. We’ve written a lot more about this, so check out our Why you should think twice about getting the new Klarna card' blog if you’re interested.

How do buy now pay later firms make money if they don’t charge interest or fees?

Buy now pay later firms make money largely by taking a cut from anything a retailer sells via their payment service. Because they enable people to buy things they can’t afford, more people are likely to buy and therefore the BNPL companies can pitch that they’ll help a retailer achieve higher sales figures. A lot of buy now pay later brands also offer other debt products outside the core ‘pay in 30 days’ service and they do charge interest and fees on those, so this is another way they’ll make money.

Do I have to pass a credit check to use buy now pay later?

Most buy now pay later companies will perform what’s called a ‘soft credit check’ before you use their service. A soft credit check is one where they do search your credit history, but it doesn’t leave a mark on your file and doesn’t affect your credit score.

By only carrying out a soft credit check, BNPL firms aren’t able to get a full picture of your debts and therefore could lend you money when you aren’t able to afford it. We’re sure you don’t need us to tell you why this isn’t a good thing, but if you borrow money when you can’t afford it, you’re going to be hit with late payment fees and your debt will spiral even further – essentially meaning they’re making money out of your struggles.

Is buy now pay later regulated?

Buy now pay later is currently an unregulated sector, although this is set to change. When it becomes regulated, changes will include:

  • Consumers will have to be offered the same protection they have with other types of credit, including affordability checks before taking on a new loan and support if they later struggle with repayments. This could protect shoppers against the possibility of easily racking up thousands of pounds in debt and spending more money than they could afford.
  • All BNPL firms will be subject to FCA (Financial Conduct Authority) rules requiring them to undertake affordability checks on customers and treat borrowers fairly.
  • Consumers will be able to complain to the Financial Ombudsman Service if they feel they’ve been treated unfairly by one of these businesses.
  • BNPL brands will have to tighten up their advertising practices to make it completely clear to consumers that what they are offering is debt.

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