Should we avoid ‘buy now pay later’ schemes?
The use of ‘buy now pay later’ (BNPL) is on the rise with BNPL providers acquiring 1.6m new customers in 2021 according to Credit Karma. The attractiveness of interest-free and flexible payment plans may seem like a shopaholic’s dream. But with UK shoppers racking up over £4.1bn in ‘significant’ BNPL debt, and the government announcing their intention to regulate the market in early 2021, this new way to splash the cash should be approached with caution.
What is buy now pay later (BNPL)?
BNPL providers allow customers to pay for purchases in interest-free instalments over an agreed period of time OR pay in full at a later date. For example, Klarna offers customers 3 main options: Pay in 3 interest-free instalments, pay in 30 days, or pay in 60 days. This probably sounds like heaven if you are anything like me and you love to shop. However, it’s important to consider both the benefits and potential risks of BNPL before diving in.
It’s interest-free
The biggest draw of BNPL services is the fact that they are interest-free. This means that you don’t incur an extra cost for spreading the payments out or choosing to pay at a later date. If you use these services wisely, you could pay for that £30 dress in instalments of £10, or wait until payday to officially part with your cash.
However, some BNPL providers do charge late fees. Whilst Klarna brands itself ‘no fees, no interest ever’, Clearpay charges a late fee of £6, and PayPal’s ‘Pay in 3’ charges a late fee of £12. You can read more about BNPL late fees here in Section 9.
It’s perfect if you’re a serial returner
We know that overconsumption is really damaging the planet, but if you are that person that buys 5 different dresses to try on for one occasion… BNPL could be a really helpful tool for you. As you aren’t paying for the item upfront, you haven’t parted with any money to try it on. This can massively relieve the stress of waiting weeks for returns to be processed. I’m not judging. I used to buy new clothes at least 2–3 times a week and using a BNPL provider probably would have saved me a lot of headache.
It’s less risky than a credit card
The fact that BNPL schemes are largely interest and fee-free, means that they are technically less risky than taking debt on a credit card. Most credit cards have an APR (the percentage of interest you’ll pay to borrow each year) of 23% with the lowest currently provided by the Bank of Scotland and Halifax at 9.93%. This still seems like an unnecessary cost if you can use BNPL for free.
Many BNPL providers also only do ‘soft’ credit card checks which means that it doesn’t leave a mark on your credit score for other lenders to see. Some providers, like Clearpay, don’t require a credit check, meaning you can use their payment plans even if you have a negative credit score. Whether you take this as a pro or a con is up to you…
Whilst some retailers, like H&M, do allow customers to use BNPL in store, it is mostly offered for online shopping, making a credit card more suitable for purchases beyond this realm.
Using BNPL products won’t improve your credit score
Now that you know BNPL schemes are less risky than credit cards, you may feel obliged to jump on the bandwagon. Not so fast. Many BNPL providers reserve the right to report missed payments to credit agencies. Two of the UK’s biggest BNPL providers, Klarna and Clearpay, can pass continuously outstanding accounts to debt collection agencies and many BNPL providers do not currently report on-time payments. This means you won’t be rewarded for keeping up with your payments and if you’re not careful to honour the terms of your agreement, you could risk damaging your credit score.
You lose Section 75 protection
Using BNPL also means losing your right to claim Section 75 protection. Section 75 laws protect consumers by binding credit card providers to an agreement that states they must protect purchases of over £100 for free. This doesn’t apply in the case of BNPL as it breaks the direct link between the consumer and the retailer. This means that if you start paying your instalments and the item arrives faulty, you’re unlikely to be able to claim a refund unless it’s directly through the retailer.
Debt is debt
There’s no dressing it up. If you can’t pay for something upfront and you use a third party payment processor to cover the cost for a period of time, you’re in debt. Whilst this isn’t necessarily a bad thing if you make your payments on time, buying things you can’t afford now and still won’t be able to afford later can lead to financial trouble.
BNPL schemes could be a great idea if you’re adept at paying back credit on-time and simply want to manage your cash flow. If such schemes tempt you to spend beyond your means and you haven’t yet got a grip on your money management, BNPL is probably best avoided whilst it’s still an unregulated sector. I’ll be steering clear for now.
Take a look at the resources below to learn more about BNPL:
https://www.open-money.co.uk/blog/buy-now-pay-later-2021-research
https://www.gov.uk/government/consultations/regulation-of-buy-now-pay-later-consultation
