Credit Building

What is buy now pay later?

Feb 22, 2021

Buy now pay later (or BNPL) isn’t new. But it is growing in popularity again with companies like Klarna, Clearpay and Laybuy appearing as payment options at online checkouts more and more. In the UK, BNPL transactions actually tripled in 2020 to reach sales of £2.7 billion from five million customers. 

So if you see it as an option at checkout, should you use it? Keep reading to find out. 

What is buy now pay later and how does it work?

Buy now pay later (BNPL) is exactly as it sounds. It’s a flexible payment option that allows you to spread the cost of a purchase over multiple payments. So you could order a £90 backpack today and (depending on the BNPL company you’re using) pay three interest-free installments of £30 until it’s paid off. Generally you get around a month to pay it off, but some companies can give you up to a year. That installments are interest-free means you can enjoy flexible payments without paying anything extra. 

So is it a no brainer to use BNPL or is there more to consider? You guessed it, there is more to think about...

BNPL and credit scores

Many BNPL companies perform a soft credit check on you when you apply to pay this way. And because soft credit checks do not damage your credit score, this isn’t something you should worry about. Even if you’re rejected.

But some BNPL providers run a hard search on your credit history. A hard search is when a company makes a complete search of your credit report. This type of credit check leaves a mark, so whenever prospective lenders look at your credit report they can see you applied for credit and whether you were accepted. Lots of these searches can worry lenders when they check your credit report as they believe it could indicate you’re desperate for credit. That’s why multiple searches can harm your credit score.

Another thing to consider is what happens if you miss a payment or don’t have enough money in your account to cover the payment. In this case you could find yourself with a black mark on your credit history (that could last up to six years) and you could also face a very big APR (annual percentage rate) on overdue balances. This makes your original purchase much more expensive in the long run. And according to Compare the Market, 45% of young people who have used a BNPL scheme in the last year have missed at least one payment.

So if you use BNPL be sure to make your payments on time. And read the small print to find out whether you’ll be soft or hard credit checked. 

BNPL is debt

BNPL is fine when it’s treated like any other debt that you’d repay. Debt is neither good nor bad. And BNPL can be a super handy solution when waiting for a refund to hit your account, or it’s a week before payday and you’ve forgotten your partner’s birthday! (Don’t worry it’s happened to us all.)

But because BNPL can push you to spend money you wouldn’t normally (say if you had to pay for those things upfront in one go), it can lead to overspending. Klarna tells retailers that customers opting to BNPL are likely to increase their spending by 55%.

Many people fall out of love with BNPL because of this. And they also don’t like seeing BNPL companies target young adults with the help of social influencers who promote it as a way to keep up with the latest trends. A recent report of the unsecured credit market led by the Financial Conduct Authority (FCA) found 25% of BNPL customers were aged 18-24, 75% of customers were female and 90% of transactions involved clothes and footwear.

Which is better BNLP or credit cards?

When you use a credit card, and make your payments on time, it can positively impact your credit score. This is because your payments are reported to the credit reference agencies. This is one of the benefits of using a credit card over BNPL. 

That said, spreading the cost of a purchase on a credit card will always involve an interest cost, unless you’re using a 0% purchase APR credit card. The interest cost is one of the major downsides of credit cards and what makes them good spending tools (if you pay the balance in full and on time). But very bad borrowing tools (if you plan to spread the cost).

With BNPL, as long as you make your payments on time, you won’t be charged any interest. Though note, if your payments become late, you will incur fees. This is in part how BNPL companies make their money. 

Many people don’t trust themselves with credit cards, and feel that BNPL is a safer option for them. But it’s important to remember that if you have multiple BNPL payments going out, it can quickly become hard to keep track of. And all those small payments can really add up. This could cause you could spiral into debt.

One way to manage this is to keep a journal so you know what payments are going out and when. This can form part of an effective budgeting strategy. And as long as your budget allows for you to afford the things you’re buying then BNPL shouldn’t become a problem.

BNPL or SNBL (Save Now Buy Later)? 

Although care needs to be taken, BNPL can provide a cheaper alternative for some people when buying things with credit. Yet among all this talk of BNPL and credit cards, it can be easy to forget that there are other payment options. For instance Save Now Buy Later (or SNBL) is where you save up money to fund a purchase, and when you have enough, you buy it. It means you may have to wait a long time to make the purchase, but that you don’t have to take on debt to do it. 

Now that sounds very sensible, and honourable even. But there are big purchases in life where if you saved up enough to buy the thing outright, it would be a lot harder. One example is buying a house. Mortgages, compared to other types of loans and credit agreements, tend to let you take on debt at a more affordable rate. And by taking out a mortgage you’re able to buy your own home. This debt makes sense because for most people saving up enough cash to buy a house outright might take most of their lives. 

So should you BNPL or SNBL? As usual the answer is, it depends. Debt is neither good nor bad. But it is important to know what you’re doing with your money and to be on top of managing it. 

Regulating BNPL

Perhaps surprisingly, buy now pay later schemes are not yet regulated in the UK. But that’s set to change. On 2nd February the government announced they are to be regulated by The Financial Conduct Authority (FCA). Why? To protect consumers. In particular by bringing in affordability checks so that BNPL is less likely to become a pathway to overwhelming amounts of debt for young people. You can read more about that here.

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