How do Buy Now Pay Later schemes work?

7 min • 16 Mar 2021
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More people than ever are using Buy Now Pay Later schemes, but, like our anonymous interviewee in episode 5 of Your Real Money Stories podcast, many aren’t 100% sure on what they’re signing up for. So we asked money and mindset coach Laura Ann Moore to set out the basics of how Buy Now Pay Later works, what to look out for and what happens if you miss a payment

Buy Now Pay Later (BNPL) schemes have grown in popularity in recent years, as more online shopping retailers offer them to their customers.

BNPL products allow you to stagger payment for your goods or services, or defer payment to a later date. But whilst they seem enticing, you should use them with care.

It’s important to understand how BNPL works so you can make an educated decision before signing up. In this blog, I’ll answer the following questions to help you better understand Buy Now Pay Later schemes:

  1. What is Buy Now Pay Later?
  2. How do Buy Now Pay Later schemes work?
  3. Does Buy Now Pay Later affect my credit score? What happens if I miss a payment?
  4. What should I be aware of when using Buy Now Pay Later?
  5. What are the alternatives to Buy Now Pay Later?

1. What is Buy Now Pay Later?

Buy Now Pay Later (BNPL) is a form of credit agreement that allows you to buy goods and services now and pay for them later (at an agreed date).

You’ll have noticed that you’re often offered Buy Now Pay Later options by online retailers when you checkout. If you chose this option and are accepted, the BNPL provider pays the retailer on your behalf. So instead of paying upfront, you have an agreement to pay back the BNPL provider.

Usually, the agreement is to either delay the payment for the whole bill to an agreed date, or to split the cost of the bill into smaller instalments that you pay back over a set amount of time.

Buy Now Pay Later has been around for a long time and started out as an option with catalogues and mail order companies. But more recently BNPL has been adopted by online retailers, especially in the fashion industry, and they are available to customers both online and in store in a few different formats.

2. How do Buy Now Pay Later schemes work?

With Buy Now Pay Later, there are a number of different options. Here’s how they work:

Pay later:

  • The total payment is delayed by a set period of time, for example 14 or 30 days.
  • There’s usually no upfront payment to the BNPL provider.
  • Typically, agreements are interest-free, so if you pay on time you avoid paying interest and late fees and will only repay the total amount of the original bill.
  • The BNPL provider will send you a reminder to make your payment in time.

At the checkout, the BNPL provider will do a soft credit check on your credit file before letting you proceed. A soft credit check will verify your home address, your date of birth and your bank details. It’s not visible to other lenders so won’t affect any other credit applications.

For example, imagine you were buying a pair of trainers worth £60. Instead of paying £60 upfront straight to the shop, you would pay nothing at the point of purchase and then have up to 30 days to pay the full £60 to the BNPL provider.

Pay in instalments:

  • The total payment is split into smaller instalments.
  • Instalments are paid over a few weeks or months.
  • Usually, the first small instalment is paid to the BNPL provider upfront, and remaining instalments are paid back on set dates over an agreed timeline.
  • Like the first option above, these agreements are usually interest-free if you pay back on time.

As above a soft credit check will been performed. Then, after you’ve agreed to the BNPL provider’s terms and conditions, the payments are taken automatically from your bank account on set dates (like a standing order).

Back to our example of £60 trainers again. Instead of paying £60 upfront to the shop, you might pay £20 upfront to the BNPL provider, £20 after 2 weeks and then the remaining £20 another 2 weeks later, which would clear your balance of £60.

With these options, there is a risk you could be taking on more debt than you can afford to pay back as. Having lots of small pots of debt with multiple BNPL providers can quickly spiral out of control.

Pay on finance:

  • The total payment is split out over a longer period, for example 6 months.
  • You agree to a formal payment plan upfront.
  • It usually includes interest added on the total amount you pay back.

This option will always include a hard credit check, which other lenders will be able to see on your credit file. If you have too many hard credit checks on your file over a short period, lenders may be less inclined to lend to you and it could affect your credit score.

Does Buy Now Pay Later affect my credit score? What happens if I miss a payment?

It depends. Buy Now Pay Later services are a form of credit and can affect your credit score negatively if you do not clear the debt in line with your agreement.

You could also end up having multiple hard searches on your credit file which can impact your credit score negatively.

However, if you’re accepted and use buy Now Pay Later services responsibly, it shouldn’t have a negative impact.

Whilst Buy Now Pay Later companies have stated that using their services does not affect your credit score, there have been multiple accounts from people who have been in a position where using the service has had an impact, so this is something to be aware of.

What happens if you miss a payment:

If you miss a payment because you forget or there is not enough money in your account to be taken for an instalment, you run the risk of:

  1. Being charged late payment fees - Not all providers charge late payment fees, but some do and the fees can be quite high. So if you do miss a payment, the total cost of the bill becomes more expensive.
  2. Being reported to a credit reference agency – this will show up on your credit file and could negatively affect your credit score.
  3. Having your debt passed over to a debt collection agency.

What should I be aware of when using Buy Now Pay Later?

The top 5 things to be aware of when using BNPL are:

Do not borrow more than you can afford

Whilst using BNPL can be tempting as it enables you to buy goods or services without having to pay upfront, you should make sure you are only spending what you can afford to pay off. Remember, you’ll always have to pay back what you borrow.

The debt can stack up quickly

It can be hard to keep a track of debt if you are using multiple Buy Now Pay Later services across different retailers. This can quickly become unmanageable. To avoid this, it’s important to keep a record of your payment dates (you don’t want to miss a payment) and of your total amount of debt across all BNPL providers.

BNPL is unregulated

If you apply for another form of credit, like credit cards or loans, these financial providers and their services are regulated by the Financial Conduct Authority (FCA), and lenders are required to be transparent with what you are signing up to and the consequences of non-payment.

With Buy Now pay Later services, this information is not very clear at the point of purchase, and it can be very misleading.

However, due to recent campaigning, the FCA will be introducing new rules requiring BNPL providers to offer more transparency around what you are signing up for, to tell customers when their 0% interest period is about to run out, and to stop them from backdating interest charges.

You are not covered by Section 75 of the Consumer Act

Section 75 states that if you buy any goods or service over £100, your credit card provider must protect you for issues such as faulty goods or if the item does not arrive.

However, if there is a third-party payment provider involved (for example a BNPL provider), these same rights might not apply. This means you’ll have less protection for your purchase.

This is a form of credit and can impact your score – You run the risk of your credit score being impacted negatively if you miss a payment, pay late or incur a lot of hard searches on your credit file over a short period. Other lenders will be able to see this and may think twice about lending to you in the future.

What are the alternatives to Buy Now Pay Later?

Whilst Buy Now Pay Later products seem like an easy and quick way to pay, make sure you are aware of how much money you are spending and the consequences when using these services.

The best alternative to Buy Now Pay Later would be to:

  • Pay upfront with cash
  • Pay on your debit card

Before making a purchase, ask yourself “If Buy Now Pay Later was not an option at the checkout, would I be able to afford this total payment?” If the answer is no, then this is an indication that you cannot afford these goods or services right now.

The best thing to do would be to wait, save up the money first and pay in cash or use your debit card when you do have the funds available. Or pay by credit card and pay the balance off in full, so you do not pay any interest.

Practicing mindful spending

This is important to help you become aware of how you are spending, to live within your means and avoid unmanageable debt.

You can practice mindful spending by asking yourself questions such as:

  • Can I afford this item right now?
  • Do I really need this item?
  • Am I making this purchase to cope emotionally?
  • And you can try waiting 24-48 hours before making a purchase, which helps you stop with impulse purchases that you might later regret.

If you do need to buy something essential, but you don’t have the money for it and taking out credit is the only option, then ask yourself; “is there a better form of credit I could take out right now?” For example, a 0% credit card might be a more cost-effective way and safe way to make this essential purchase.

If you are finding yourself with debt issues that you ae struggling to manage alone, please know that there is help – you can get in touch with Citizens Advice or StepChange and they will be able to offer free support.

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