Buy Now Pay Later is a common option at the checkout today -– but are we becoming over-familiar with it? Is it a good borrowing facility to flex, or should we avoid it? Financial advisor Michael Barton runs through the Buy Now Pay Later pros and cons, and what to look out for.
Demand for Buy Now Pay Later (BNPL) has boomed in the last couple of years. It’s estimated that BNPL spending in the UK will explode from less than £10 billion in 2020 to more than £26 billion in 2024. That’s around £400 for every person living in the UK.
Should you take advantage of BNPL schemes?
What are the risks of doing so?
Are there better ways to pay?
Quick Verdict On Buy Now Pay Later
If you are disciplined with money, then you could benefit from BNPL deals. You could take advantage of discounted prices during sales and budget more flexibly.
However, if you might miss a payment or be unable to repay in full before the end of the payment term, BNPL can be extremely expensive and damage your credit score.
The best of the BNPL providers in my view is Splitit. It uses your existing credit accounts to deliver 0% interest, no late payments fees, and no credit check, with payment terms of up to 24 months available.
How Does BNPL Work?
Buy Now Pay Later is a very simple concept. You select what you want to buy, agree to pay later, and then take the item away. With most BNPL deals, you’ll need to pay a set amount at regular intervals.
Years ago, BNPL offers were set up by the retailer, usually through a finance company. The deals available were limited, and often coincided with sales periods.
Today, there are a growing number of companies offering BNPL facilities. Most won’t charge you interest on the amount you spend, providing you stick to the terms of the BNPL agreement. You may have anything from a few weeks to a few months or a year to repay.
A deal like this, with no interest to pay? Surely, it’s a deal that’s too good to refuse.
Advantages of BNPL
The biggest advantage of BNPL is that it allows you to buy something that you might not have been able to buy otherwise. This can be tremendous to take advantage of when items are in the sale, or to buy something before your salary hits your bank account.
Because you pay over a set period, you’ll also benefit from flexibility. This could make budgeting easier for you. If your washing machine breaks down beyond repair, you won’t need to wait to replace it.
BNPL can also help you build or rebuild your credit score, because they provide evidence that you can make regular payments without defaulting. This could help you get credit at lower interest rates in the future.
With deals that are, what I call, ‘proper’ BNPL, you could take advantage of a discounted sales price and earn some interest on your money. My wife and I did this when we bought our first new three-piece suite.
Many years ago, we bought the sofa and two chairs from a large, well-known furniture store. Signed a form to say we would pay the full amount within a year, and had the furniture delivered a week or two later. Total cost was around £1,000, discounted from the RRP of £1,400.
I had the money to pay, but I put it into a savings account instead. At that time, the interest rate was around 7%.
11 months later, I withdrew the money, plus around £60 interest, and paid off the BNPL deal.
Risks of BNPL
Before you get carried away by the excitement of BNPL, we should warn you about the risks involved.
The first of these is that if you miss a payment or fail to repay before the BNPL deal expires, you could be hit with high interest rates, fees for late payments, or other penalties.
Second, late payments could damage your credit score and make obtaining other credit more difficult and more expensive, too.
Third, they can encourage you to overspend – and overspending is a surefire way to get yourself on a debt spiral. Once on it, you’ll need to budget harder to get out of debt.
Another disadvantage is that many retailers have not partnered with any, or all, BNPL providers. You may pay more for that hairdryer you want than elsewhere, or you may need to pay a transaction fee to spend through your BNPL provider. Either way, you could negate any financial advantage you were hoping to gain.
Know the Terms & Conditions
One of the secrets of avoiding getting into a mess with BNPL is to read the terms and conditions. The most important factors to consider are:
Interest Rate: Is there interest to pay, and if so, how much will you be paying? Low interest rate deals are good. Zero interest rate deals are best.
Fees Payable: Are there any fees payable, either at the time of purchase or when making payments? Fees could add a considerable sum to your purchase price.
Length of BNPL Period: How long will you have to repay your debt, and how often will you be required to make payments to your account? The longer the length of repayment term, the lower the payments will be. You should always be certain that you’ll have enough time to repay in full.
Credit Check Requirements: Most BNPL providers will run a hard credit check on you. This is likely to flag up on your credit score, and reduce it – making it more challenging to obtain other credit.
Is BNPL right for you?
Here are five tests to decide if BNPL is right for you:
Are you a disciplined budgeter?
This is the absolute key to benefitting from BNPL. You must be disciplined with your money. You must make payments on time, and ensure you will repay in full within the period under the terms and conditions.
Can you afford to pay off your BNPL?
Will paying off the debt in full within the allotted payment period put stress on your finances? Think about all your expenses coming up.
Do you have other debt already?
Make no mistake, BNPL is debt even if it might not feel like it. Taking on more debt is rarely a good idea, and will usually lead to a worsening of your financial situation, even if it is very short-term debt.
Does it fit with your longer-term financial goals?
BNPL could impact your efforts to achieve your long-term financial goals. These might include paying off your debts, building an emergency fund, or saving a deposit for a home. More debt will not make you wealthier.
Have you considered the alternatives?
There are several alternatives to BNPL that might be better for you in your unique financial circumstances. These include:
Credit Cards – Most credit cards allow you to pay for your purchases at any time in the month following your statement dates without incurring interest charges – up to around 56 days of interest-free credit. But, if you fail to repay the full amount every month, you could be hit with high interest rates on the unpaid balance.
Personal Loans – When you apply for a personal loan, you receive a sum of cash. You can spend this how you wish, repaying the loan in equal instalments over a pre-set term. This type of credit may be a good option if you have a costly purchase to make and don’t have the cash available.
Point-Of-Sale Finance – Some retailers offer point-of-sale financing. Typically, this is for higher ticket price items, such as furniture and electrical goods. Some of these finance deals offer interest-free periods.
Should you pay the balance owed later than this, you’ll usually find that the interest rate charged is higher than for personal loans and may also be higher than charged on a credit card.
Save And Negotiate – If you can wait to make your purchase, then saving and negotiating is your best option. You’ll earn interest on the money you save, and it’s always possible that a retailer will discount the purchase price when you pay the full amount without using credit. Plus, waiting also gives you the opportunity to reconsider the purchase, or to look for a cheaper option.
5 Popular BNPL Providers in the UK
You’ve decided that BNPL is a good option for you. Now the question is, which provider is best for your needs? Here’s the lowdown on five of the most popular BNPL providers in 2023:
Splitit
There are no fees and no interest to pay when you use Splitit, a card-based BNPL facility. You also receive rewards when you use Splitit, plus transaction insurance and protection against fraud. You choose the length of repayment period, which can be between 3 and 24 months.
How can it offer all this? Splitit works differently to the other BNPL providers we’ve mentioned. It uses the credit accounts you currently possess, and puts a hold on them over your unpaid amount. This lets you pay off your balance over time without incurring interest charges. The rewards you receive depend upon the underlying credit accounts.
What happens if I miss a payment? No late fees. No credit checks. 0% interest. However, you should remember that your credit provider may charge a late fee and add interest if your payments are late.
Klarna
Klarna partners with retailers worldwide. You can also use the Klarna app to take advantage of flexible payment options anywhere online. You can pay within 30 days or by three interest-free payments over two months (the first at point of sale, the second 30 days later, and the third 30 days after the second.)
For higher-priced items, you can pay over time – up to 36 months – though interest is payable (around 22% at the time of writing.)
What happens if I miss a payment? You receive a reminder two days before payment is due. If you do miss a payment, your credit score won’t be impacted and Klarna will not charge you fees or interest. However, if you still do not pay, Klarna will demand payment in full within 15 days.
Clearpay
Through Clearpay, you receive a fixed credit amount. It’s an app-based BNPL that allows you to pay over six weeks in four interest-free instalments. How much credit you have depends upon the limit it assigns to you. This is based on your previous service usage.
What happens if I miss a payment? Late fees apply if you miss a payment. The fee is £6 for each late instalment, and a further £6 if it is still unpaid after 7 days. Late charges are capped at £24 of 25% of the order value, whichever is the smaller.
Laybuy
Laybuy allows you to pay for goods over six weeks, by paying in weekly instalments. Payments are taken automatically from your bank account.
What happens if I miss a payment? Late payment fees apply ─ £6 after 24 hours of non-payment. Failure to pay within a further 7 days results in another £6 charge. The maximum late payment charge is £24 for any single purchase. Late payments may also impact your credit score.
Payl8r
Interest-free credit if you pay in full within 30 days. You can also choose to split the payment and pay over 0 to 18 months, though interest will be charged (currently at an APR of 48% over 12 months).
What happens if I miss a payment? Late payment charges will be levied, and these are detailed in your credit agreement. Your credit score may also be affected.
3 Tips for Effective Use of BNPL
Here are three tactics to make sure you use BNPL as an effective weapon in your financial armoury:
1. Never Take on More Debt Than You Can Afford
Debt is (almost always) bad. But there are good debts, too. The trick to make debt work for you is to never overstretch. If you are considering credit of any type, work through your budget and ensure you can afford the payments.
2. Always Make Payments on Time
Late payments can be costly. You might incur late payment fees, have interest charged to you, and damage your credit score. Put your payment dates in your diary. Better still, set up a standing order or direct debit (if possible) to make certain each payment is made on time.
3. Pay Off the Balance Before the Interest-Free Period Ends
Always pay off the balance before the end of the interest-free period. If you don’t, things could get messy – and expensive.
The Final Word
The bottom line is that BNPL has its place. Whether this is part of your financial toolbox depends upon your unique financial situation. It’s always wise to explore all options. Whichever credit tools you choose, make sure that you never overstretch and can pay on time.