Buy Now Pay Later, good now, bad later?

As the industry faces further scrutiny, with more people asking if Buy Now, Pay Later in the UK gives them bad credit history, MustCompare examines both the pros and cons of this form of consumer lending.

• What is Buy Now Pay Later?
• Is Buy Now Pay Later a good idea?
• Does using Buy Now Pay Later affect my credit score?
• Alternative payment methods
• How safe is Buy Now Pay Later?

What is Buy Now Pay Later?

Buy Now Pay Later (BNPL) lets shoppers buy goods at retailer checkouts and pay for them later. BNPL schemes are similar to short term loans and other similar short-term financing, except there usually are no interest charges. Additionally, if approved, the shopper will likely need to make an initial payment, followed by interest-free instalments, although this does depend on providers and schemes. It has been around for many years but exploded during the Covid-19 pandemic as more people turned to shopping online during the lockdown, and Buy Now, Pay Later apps in the UK became better known.

From August 2022, approximately eight million people in the UK owe money through borrowing in this fashion, according to a report by reference agency Credit Karma. The total amount owed was £4.14bn. Most retailers now offer at least one version of BNPL to customers at the checkout on terms that range from paying within an agreed time period to multiple payments breaking down the total cost.

Some of the most well-known Buy Now Pay Later companies are outlined below.

Klarna

Once Europe's most valuable private tech company, Klarna was also the most downloaded BNPL app between January and July 2020. The company offers three different payment methods, with the first two being interest-free. When consumers use Pay In Three, they split the checkout total into three payments, one due immediately, the second 30 days from the purchase date and the final 60 days after the purchase date.

The pay in 30 days option allows consumers to pay the full outstanding balance up to 30 days later. There is no late fees charge, however, they may share your details with credit reference agencies if you miss a payment and will appoint a debt collection agency if you fail to pay altogether. Klarna financing distributes the cost of the purchase for up to 36 months; the first payment is taken one month after your purchase, and they continue monthly until full payment is complete.

A less widely used option aimed at larger purchases charges interest, and a soft check for credit score is also completed at the time. Read our expert guide on the difference between soft and hard credit checks to find out more.

Clearpay

Clearpay offers one option to pay your total balance in four parts within six weeks. The first instalment is due immediately. If you miss an instalment, you could be charged a late fee which is capped at 25 per cent of the total purchase.

Laybuy

Laybuy enables you to spread the cost over six automatic weekly payments, interest-free. If a payment is missed, they will attempt again after 24 hours, and if it fails, they will apply a late fee.

There are a growing number of Buy Now, Pay Later offerings on the market, each with different features depending on the retailer or merchant. Recently, even high street bank NatWest have announced intentions to enter the market.

Last month, tech giant Apple confirmed it was to launch its own BNPL scheme in the USA. In response to this, America's top US consumer finance regulator issued concerns about the use of customer data. The Apple scheme is only intended to operate in the USA initially; however, if it proves to be popular, it is likely to come to the UK market as well.

Is Buy Now Pay Later a good idea?

That depends on your circumstances. For people making a one-off purchase that is out of their budget today but affordable when spread over several payments, it can be a fitting, convenient and cheap credit solution. But the payments must be managed correctly for that to be the case.

One of the attractions of BNPL schemes is the majority are interest-free, which may make them seem easier to pay down the line. However, they are still a form of debt and will have to be paid back. Too many of these purchases, even without the initial interest charges, can snowball and get out of control.

Research by Citizen's Advice has shown that one in 12 people are using BNPL options to cover their daily essentials. This may be unsurprising in a cost of living crisis, but the same research also found that two-fifths of customers had to borrow or take out a payday loan to make the BNPL repayments.

This could be the start of a spiral of debt due to the high fees and short repayment terms typically charged by payday lenders. There are other ways to lower costs, such as electricity bills, as we discuss in our recent blog. When considering using Buy Now, Pay Later, the main question is whether you can afford the repayments when they are due.

Another danger is BNPL schemes can make wants as opposed to needs easier to obtain, and therefore a temptation for shoppers who struggle to stop overspending.

Does using Buy Now Pay Later affect my credit score?

In a word - no. Or not yet, anyway. From June 1 this year, Klarna began sharing BNPL information with credit reference agencies Experian and TransUnion. That means purchases will be visible on your credit files - not to be confused with credit scores, which are numbers determined by credit bureaus, designed to indicate in numbers how reliable you are when it comes to borrowing and repaying money to lenders. A good credit score number in the UK is dependent on the credit bureau, as all use different scoring systems and ranges of numbers.

Klarna says it will share purchases that have been paid for, late payments and unpaid purchases to give the 'UK financial industry greater visibility on the use of Klarna's BNPL products, help to improve affordability assessments, and means Klarna consumers who make payments on time will see long-term benefits, showing lenders they use credit responsibly.’

Both Klarna and TransUnion have reassured consumers that this will not have an impact on a customer's credit score right now - although it could do so in the future. It is good personal finance practice to monitor your credit reports regularly to be aware of what lenders may see and of any potential issues.

MustCompare has compiled a handy comparison of the credit report services you can use for this purpose. Other BNPL companies have yet to make any announcements on whether they will follow suit with sharing information as Klarna now is. With things changing frequently, it is always worth double-checking the terms and conditions before proceeding with a purchase.

And when it comes to Buy Now Pay Later, as with any form of credit, approval is not always guaranteed approval. Consumers can be refused, therefore it is worth checking your credit score. The FCA (the UK's financial regulator) is keen to get BNPL companies further regulated by 2023 to give consumers more transparency and ensure that customers are treated fairly.

Alternative payment methods

There are alternatives to Buy Now and Pay Later, although they do not all provide the same instant gratification. The options include:

• Saving for the item by making a budget to set money aside each month
• Consider using a prepaid card for shopping and only loading it with the money you plan to spend. As there is no overdraft or credit, there is less chance of getting carried away.
• Asking for it as a birthday or Christmas gift instead
• Using a credit card responsibly by paying off purchases within the grace period or taking advantage of an interest-free offer.
• It is best to avoid high-interest options such as payday loans that could be difficult to repay and lead to a cycle of borrowing and debt.

How safe is Buy Now Pay Later?

When repaid as intended, BNPL can be a fast and affordable credit option. The danger, as with all borrowing options dating back to when people used to buy 'on tick', is when that does not happen.

Consumers should consider whether they can genuinely afford such purchases, research the array of Buy Now, Pay Later apps in the UK and be aware that lenders may also consider them when it comes to future borrowing.