The pros and cons of buy now, pay later

Buy now, pay later schemes let people defer paying for what they buy. Here’s what you need to know about these schemes, and whether they’re worth signing up to.

Written by

Alex Hasty

Insurance and finance expert

Posted

21 SEPTEMBER 2021

4 min read

How does ‘buy now, pay later’ credit work?

Buy now, pay later (BNPL) schemes allow you to spread the cost of a purchase. This could be especially helpful when you’re buying big-ticket items, like a laptop or sofa for an unfurnished house, as it means you can potentially break down the cost into more manageable chunks.

Our research shows that nearly 20% of UK shoppers now regularly use this form of finance – up from 11% before the pandemic.

It’s important to note that the buy now, pay later industry is currently unregulated. This means that if you have a dispute with a provider, you cannot get support from the Financial Ombudsman. The industry is due to become regulated by the Financial Conduct Authority (FCA) in the future.

What buy now, pay later schemes are out there?

You may have already come across some of the many buy now, pay later options. PayPal Credit, Klarna and Clearpay are just a few of the companies out there offering flexible credit. However, there are considerations to bear in mind before using these schemes.

What are the terms of buy now, pay later?

Different schemes offer different terms, so as always, it pays to read the small print. Some companies will give you a month to pay, but others let you spread the cost over a year.

Two of the main operators workare Klarna and PayPay Credit.

With Klarna, you split the cost of your purchase into three interest-free payments. You make the first payment when you buy the item, with the second coming out 30 days after that. Klarna was recently valued at a whopping $45.6bn . Many retailers, including Asos, Lululemon and River Island, now offer it as a payment option.

PayPal Credit describes itself as ‘a credit card without the plastic’. It gives you 0% interest for four months on purchases over £99.

What are the pros and cons of buy now, pay later?

As with any form of finance, buy now, pay later comes with a whole host of pros and cons. Here are some of them:

Pros:

You don’t have to wait until payday to get that must-have item. But you should never use BNPL unless you know you’ll be able to pay all the money back.
When money is tight, BNPL could be a helpful way to spread the cost of major, necessary purchases. For example, a new fridge if your old one has packed up and the warranty has expired.
As with some credit cards and loans, buy now, pay later schemes can be interest-free.
Lots of companies are now offering buy now, pay later. That means you could shop around for terms that suit you.
It’s easy to manage your account on an app.

Cons:

It’s way more tempting to buy things you can’t afford – 13% of people we asked admitted that BNPL encourages them to spend more money than they otherwise would.
With BNPL you need to be sure you can afford the repayments, as – unlike with other loans and credit cards – BNPL lenders do not always carry out strict affordability checks. This should change, however, with the new regulations.
If you miss a payment, the interest payments can be extremely high.
A missed payment could affect your credit score.
Not everyone is accepted for finance – if your credit rating is bad, you may find you’re turned down as some BNPL companies carry out what is known as a ‘hard’ credit check. When the new regulations come into effect, all BNPL schemes will need to be more stringent about these checks.
There may be other, better finance options available to you, for example an interest-free credit card.
BNPL tends to be popular with young people, some of whom may be less financially responsible. Our research showed that 18% of young people had missed a payment in the past year.
The BNPL industry is currently unregulated in the UK

What happens if I forget to pay?

Missing payments is definitely a bad idea, as there are likely to be consequences. These could include:

Being charged for a late payment.
Being unable to use that BNPL scheme, or others, in the future.
Your credit rating being affected. This could make it hard to get a loan, mortgage or credit card in future.

Frequently asked questions

How can buy now, pay later impact your credit score?

Buy now, pay later is a form of credit. A hard credit search is run for some forms of BNPL finance and this could impact your score in the short term. And if you miss a payment, this information could be passed on to credit agencies, and your credit rating could be affected.

Also, it’s a bad idea to apply for lots of credit at once. Lenders might assume you’re in financial trouble and could hold back on giving you a loan or mortgage.

If I have bad credit, can I still qualify for buy now, pay later?

Most buy now, pay later firms, from AppToPay to Zip, could pre-approve you for credit. But if you have too many black marks against your credit record, you could be refused finance. Having said that, if you behave responsibly when it comes to paying bills, you shouldn’t have a problem.

Buy now, pay later vs credit cards

Which is better? Here are some factors to bear in mind:

Buy now, pay later often requires an upfront payment, whereas credit cards allow you to defer the whole cost.
With credit cards, you may incur other costs, such for example annual fees.
Credit cards are still accepted at more retailers. You could use a credit card to buy everything from petrol to perfume, whereas only some shops – usually online – offer buy now, pay later.
Credit cards could offer you rewards like air miles or cashback. You won’t get these with buy now, pay later.