In February 2021 the FCA published a report into the unsecured credit market, curated by its former Interim Chief Executive, Christopher Woolard. One of the major points covered in the Woolard review was the unregulated Buy Now Pay Later space, which exploded in popularity during the coronavirus pandemic in 2020.
The report also found that the use of BNPL quadrupled in 2020, with 5 million customers choosing to use the service when paying online. Despite the popularity, this unregulated access to credit could lead to financial distress for consumers, especially if the consumer is already in debt or is unable to pay for the products in the alotted time.
If you were thinking of using BNPL and weren’t sure if it was safe to do so, we’ve broken down the major facts about the service along with the pros and cons and alternative financial products you might want to consider instead.
What is Buy Now Pay Later?
Buy Now Pay Later is a financial product allowing you to delay the payment of a transaction online. It is most commonly associated with online fashion retailers such as ASOS, Boohoo and Missguided, but it can also be found integrated into the customer journey for online retailers of electronics, beauty and homeware.
You will usually find BNPL integrated with a shopping basket when shopping online, meaning that you can choose this option as an alternative to paying up front using a debit or credit card. The most popular BNPL brands in the UK include Klarna, Clearpay and Laybuy.
How does Buy Now Pay Later work?
Once you have shopped online and put items in your basket, you will come to the stage of selecting how you will pay for your products. Online retailers who have a Buy Now Pay Later option will then offer this as an alternative to paying up front using a debit card, credit card, Paypal, Apple Pay, Google Pay or associated payment scheme.
There are various options with BNPL including paying an invoice within 30 days, spreading the cost of a transaction into interest-free monthly instalments or splitting payments across a number of months with added interest.
Standard BNPL services should usually be interest-free and will not require a credit check, meaning that using the service would not affect your credit score. However, there are also BNPL options that will include added interest payments and a full credit check
Is Buy Now Pay Later a good idea?
At face value, Buy Now Pay Later is a convenient alternative for online shoppers who are looking to spread the cost of their purchases for free. The integration with online retailers is so seamless that it means it is as easy as clicking a button.
However, whilst a small number of transactions using BNPL is fine, if they start to pile up you can end up with a large amount to pay off for the next few months, which could jeopardise future expenses. The result is the need for BNPL services that will charge interest and will require a credit check, which could be more expensive and lower your credit score.
For a balanced view, we take a look at the pros and cons of Buy Now Pay Later below:
Pros of BNPL
- Convenient – available at shopping basket stage on many major retailers meaning it is available at the click of a button
- Smaller payments – break down transactions into affordable instalments with 0% interest in most cases
- Not a full credit check as standard – unless you’re spreading the cost for a longer time, you can usually get away with not having to have a credit check
- Flexible – change number of instalments or period of time to pay off easily through an app or online service
Cons of BNPL
- Too convenient – there is the temptation to never pay up front. This can lead to a build up of micro-payments which create larger debts
- Knock-on effect – it can be quick and easy to choose BNPL, but it means that you might have to pay for products weeks and months in the future. This could reduce your future income and leave you struggling if there are any unexpected expenses
- Build-up can lead to added interest – while the standard BNPL is free, other options will require you to pay interest and will need a full credit check
- You will have to pay for it eventually – while it is very convenient not paying, you will have to pay eventually. If you don’t have the money to pay it in the future, BNPL can get you into financial difficulty
Alternatives to Buy Now Pay Later
If you’re unsure about BNPL or have struggled with the build up of micro-payments before, then you may want to consider other options, rather than get stuck paying for products over several months. There are plenty of financial products that, if properly managed, can make sure you avoid paying anything extra.
- Use a 0% Purchase Credit Card – while this option requires a credit check, it means you have plenty of time to make purchases and pay them off. Just make sure to keep paying the minimum payment each month and reduce your balance to £0 by the time your 0% interest period has ended
- Use a 0% interest Overdraft – if you are a student, you can also use a free overdraft to pay for purchases. However, this is also a temporary solution and will need to be paid off by the time you finish your course
- Pay up front using a Savings pot – one alternative is to plan ahead and give yourself a pot of money to use for making certain purchases. Plenty of current accounts have additional saving options or you could open an Easy-Access Savings account instead
- Pay up front using a Current Account – the best alternative is to pay for your items up front using a current account. This will ensure you can afford the payment and you aren’t paying anything in interest. Always make sure to check your balance prior to spending.
The key here is planning ahead, ensuring that rather than paying for products in the future, paying for them in the present instead. That can be achieved by paying up front or by saving up enough to afford it. If you really have to spread the cost, then make sure you can definitely afford it and use a method that means you pay nothing on top.
So, look after future-you and make sure the micro-payments don’t pile up if you decide to use Buy Now Pay Later.