Ten things consumers need to know about Buy Now Pay Later

When it comes to the worlds of consumer and fintech, Buy Now Pay Later is the phrase on everybody’s lips. The development is in the news as much as the cost-of-living crisis, and the two concepts have some synergy, with some people now relying on it to pay for daily essentials.

But what is Buy Now Pay Later (BNPL), how does it work and does using it have any impact on a good credit score in the UK? Here the experts at MustCompare reveal the ten things you must know.

1. What BNPL is, in a nutshell

Buy Now Pay Later does exactly what it says on the tin. It is a form of financial technology that lets people buy goods now and pay for them later. Typically, it can be found as an option at a retailer’s website checkout when shopping online.

Many retailers offer at least one type of BNPL to customers on various terms, such as pay in three or pay in 30 days.

2. The popularity of Buy Now Pay Later

The explosion in e-commerce during the Covid-19 pandemic propelled BNPL into mainstream popularity, although it had been around for years, along with a sharp increase in Buy Now Pay Later apps in the UK.

As of August 2022, it is estimated around eight million people in the UK owe money through borrowing in this way, according to a report completed by reference agency Credit Karma. The total amount owed at that time was £4.14bn.

Citizen’s Advice has also found that one in 12 people use BNPL options to cover daily essentials. The same research found that two-fifths of customers then had to borrow money or take out a payday loan to make repayments.

3. The mainstream BNPL companies

Klarna, with its pink logo, is often what people think of when it comes to BNPL. It has spent time as Europe’s most valuable private tech company and was the most downloaded app in the Buy Now Pay Later market between January and July 2020.

Clearpay is another popular option on the market and has even become the primary sponsor for London Fashion Week in a two-year partnership that began in February 2021.

And there is Laybuy, which is accepted by UK high street retailers such as & Other Stories, and online retailers like Boohoo. There are many more providers of BNPL, each catering to different markets and demographics.

4. How BNPL works and what it costs

There are multiple options when it comes to settling your BNPL bill.

Some are interest-free, such as Klarna’s Pay In Three scheme that splits the total into three payments, one due immediately, one 30 days later and the final 60 days after the purchase.

For larger purchases, Klarna financing spreads the cost of the purchase for up to 36 months. The first payment is taken one month after purchase, and they continue monthly until the full payment is complete. This option charges interest and involves completing a soft check for credit score.

Clearpay allows customers to pay the total balance in four parts within a total of six weeks. The first instalment is paid immediately, and a late fee is charged if you miss one.

Laybuy allows you to spread the cost over six automatic weekly payments, interest-free.

They may apply a £6 late fee if a payment is missed twice.

5. Is BNPL a good idea?

That depends. It can be a fitting, convenient and cheap credit solution for customers wanting to make a one-off purchase that is not within their budget today but reasonable when spread over several payments. But the costs must be managed correctly for that to be the case.

If not managed correctly, it could be the start of a debt cycle due to late payment charges if you miss payments, as well as having a negative impact on your credit rating, which could make it harder for you to get approved for credit in the future. The main question to consider is whether you can afford the repayments.

6. How Buy Now Pay Later affects credit scores

Since 1^st June 2022, Klarna has been sharing Buy Now Pay Later UK data with credit reference agencies Experian and TransUnion. This means that Buy Now Pay Later purchases made through Klarna will be visible on your credit file as a soft credit check, which Klarna says will not affect your credit score. However, Klarna have stated that if you apply for one of their Financing options, a hard credit check will be performed, which may affect your credit score. Klarna and TransUnion have reassured consumers that BNPL purchases showing on your credit file will not impact your credit score right now – but it may have an impact in the future. Other BNPL companies have yet to announce whether they will follow suit.

Your credit file is not the same as your credit score, the latter being a number that credit reference agencies assign to you that indicates how reliable you are at borrowing and repaying money to lenders.

A good credit score is achieved through being a responsible borrower, and there are positive steps you can take to improve your credit score. It is a good idea to check your online credit report on a monthly basis to keep an eye on your financial information. 

7. How BNPL is evolving – fast

In recent months there have been many industry developments. Several tech giants and high street bank NatWest have announced intentions to enter the market. Last month Apple confirmed it was to launch its own BNPL scheme in the USA, triggering concerns about the use of customer data from America’s top US consumer finance regulator.

The FCA (the UK’s financial regulator) is keen to get BNPL companies further regulated by 2023 to give customers more transparency and make sure that customers are treated fairly. 

8. Does Buy Now Pay Later guarantee approval?

No, that is not always the case. Consumers can be refused, and it is worth checking out the terms and conditions of the provider before considering a purchase. It is also good personal finance practice to monitor your credit files regularly, so that you can quickly spot any potential issues that could lead to a rejected BNPL application.

9. The alternatives to Buy Now Pay Later

There are alternatives to using Buy Now, Pay Later.

The most obvious is the tried and tested buy it when you can afford it route. Waiting a few more days until after payday to make that purchase of a new pair of shoes on your debit card, rather than opting for instant gratification, means you avoid unnecessary borrowing, and don’t risk impacting your credit rating.

Regarding non-essentials, another way of funding larger purchases is to save up. Online bank accounts make this easy by offering functions such as rounding up spends to the nearest £1, and funneling those small amounts into an attached savings account. You can even assign goals to your savings, to help focus your efforts and achieve that big purchase quicker.

Using a credit card responsibly by repaying purchases within the grace period or taking advantage of an interest-free offer remains a longer-term alternative. However, it is important to be disciplined with spending on credit, and not allow yourself to run up debt that will be difficult and costly to repay.

If you can, it’s best to steer clear of high-interest options such as payday loans, especially for non-essential purchases.

Another major money concern consumers and businesses face currently is the high cost of electricity and gas, but there are other ways to save money on energy bills.

10. The future of Buy Now Pay Later

BNPL has shaken up the consumer finance market. The latest development in the industry seems to target businesses instead of shoppers.

Bloomberg has reported that startups in Buy Now Pay Later are looking to provide companies with short-term loans that help them go about their trade faster than traditional finance from banks. Watch this space.