Are you one of the millions of shoppers who has already taken advantage of Buy Now Pay Later (BNPL)? Or perhaps not quite sure whether you should give it a try? In this article, we’ll give you the low-down on BNPL so that you can decide if it’s the right option for you.
Often seen as providing quick access to credit, BNPL has rocketed in popularity over the last few years. In fact, the BNPL industry is expanding by around 39% each year and it’s now the fastest growing online payment method in the UK.
Around 5 million people in the UK have accessed buy now pay later services according to the Financial Conduct Authority’s ‘Financial Lives 2020’ report. BNPL providers lent an astonishing £2.7 billion to consumers in 2020 (The Woolard Review, FCA, 2021).
When considering using buy now pay later as a payment option, consumers need to know exactly what it involves. Does it really offer cheap borrowing and quick access to credit? Are there risks with BNPL? Let’s find out.
Buy now pay later, in simple terms, allows consumers to purchase goods now and to pay for them later. It’s a form of credit. So instead of paying the retailer upfront for your goods, you can choose to spread the payments out over a set period of time, usually weeks or months.
When you’re buying something online and get to the checkout, one of the payment options you’re likely to be given is BNPL. When you use BNPL, your purchase is paid for by the BNPL provider and you then agree to repay them the full amount.
BNPL has become a popular way to buy things because it allows people to get the things they want but may not be able to afford to pay for in one go. Or sometimes a consumer simply wants to take advantage of what can be an interest-free way to borrow.
BNPL is seen as cheap borrowing as there are no fees for you to pay to access, and use, the credit. In the background, the BNPL companies make money by charging the retailers.
There’s usually no interest to pay when you use BNPL, but there could be late fees that the BNPL provider adds on to what you owe.
The UK’s major buy now pay later providers include:
They all vary slightly but the overall concept is the same. They all have an app that you can download so that you can keep track of what you owe to which retailer and when your next payment is due.
The BNPL options that are available to you will depend upon the retailer that you are shopping with. Some retailers offer just one provider whilst others offer you a choice of BNPL providers.
To give you a feel for the number of retailers that you can choose from, Klarna alone partners with over 6,500 retailers.
BNPL has been around for quite a while, but it’s recently had a total rebrand which is why it’s shot to fame. BNPL is now a multi-million pound industry and BNPL providers know it.
So while their claim to fame is get your goods now but pay later, some providers including Klarna have expanded their offering to include a ‘pay now’ service. So with this option, you pay the balance in full when checking out.
When checking out online, you will often see these options listed as ways to pay. You may also see a new service offered by PayPal known as ‘Pay in 3’. There is also a new offering from Monzo which has seen it become the first bank to enter the BNPL market.
We have, so far, only referred to BNPL as an online payment option. This was certainly the case when these providers first entered the market.
However the BNPL market has evolved and now it’s possible to use BNPL providers while shopping on the high-street.
Here’s how it works:
When you apply for credit with a BNPL provider, they’ll carry out some checks on you. These are partly to confirm your identity, but they’ll also check your credit file.
The important thing to know here is that most BNPL providers do soft credit checks (not hard credit checks). A soft credit check means that it doesn’t leave a footprint that other lenders can see.
The application process is extremely fast. This is what makes BNPL so convenient. It allows quick access to credit that, even with the application process, can see you checking out in just a few minutes. Of course, when your account has been approved, future checkouts are even faster.
With an account set up, you’re given a credit limit that you can spend up to. This is usually in the hundreds of pounds rather than the thousands that you may be able to access with a credit card.
When you make a purchase, the purchase amount comes off your credit limit. While BNPL started off as a way to pay for big-ticket items, that’s now changed. You can usually use BNPL to pay for goods of any value.
With buy now pay later offering a cheap and quick way to borrow, it’s not surprising it’s become hugely popular. 37% of British shoppers say they’ve used BNPL and 54% of millennials have used BNPL.
BNPL can be great for people who want or need to delay their purchases or spread payments for a big-ticket item. For example, Hayley wants to buy a new TV and the way she can afford this comfortably is by spreading the payments over several months using BNPL.
For others, the pull of BNPL is not having to pay for items you’re likely to return. Let’s take clothes for example. When you’re shopping online for clothes, you can’t try things on. So you may hedge your bets and buy multiple sizes.
You know you’ll return whatever doesn’t fit right and only keep one. Using BNPL for this type of purchase means you don’t have to pay upfront for something you won’t keep.
BNPL can be used to purchase almost anything that you can think of. While its popularity stemmed from clothing, you can now use it for tech devices, jewellery, and even groceries.
While cheap borrowing and quick access to credit may seem appealing, there are some downsides that BNPL users need to be aware of.
The Woolard Review brought to attention the fact that BNPL is unregulated. This means that some BNPL providers don’t carry out adequate affordability checks on the borrower’s financial circumstance before approving the loan.
These affordability checks are important because they help prevent consumers from borrowing more than they can afford to pay back, the precursor to getting into debt.
Another potential problem with BNPL is that the consumer doesn’t get the same level of protection with their purchases as they do with a credit card.
Specifically, Section 75 of the Consumer Credit Act means that your credit card provider must protect purchases over £100 for free. This means you can get your money back if there’s a problem.
With BNPL you don’t get that protection. So if your new TV that you bought through BNPL turns out to be faulty, usually you can’t call on your credit card provider to help resolve the problem or complain to the Financial Ombudsman.
However, it’s still possible to pursue a chargeback if you’re unhappy with a purchase when you pay using BNPL.
BNPL payments should be taken automatically. However there are all sorts of reasons why this might not happen.
It can be easier to spend more than you can afford when BNPL is a payment option. Because the affordability checks the BNPL providers do are patchy, you might end up borrowing more than you can comfortably afford to pay back.
So if you don’t budget correctly one month and there’s not enough in your account to cover the BNPL payment, it usually means a late fee. Missed or late payments can also be reported to credit reference agencies so it could count against you when you try to apply for credit in the future.
BNPL is quick and convenient. This means that some shoppers may be less likely to reflect on whether they’re buying more than they can afford to repay. The pressure to live for today makes BNPL highly appealing.
But using BNPL to pay for goods online doesn’t make them cheaper. You’ll have to pay for them eventually, so be sure to know how much you can comfortably repay.
Of course there is a wealth of credit products available to many people depending on their credit score and other financial circumstances. Credit cards, overdrafts, and payday loans are just some examples of loans.
With loans there are nearly always interest rates, late payments, time-consuming checks and, the big one, the risk of debt. But not everyone wants to take the risk of getting a loan, especially if it’s just a small amount of money that they need.
For those wanting to avoid loans, there is an alternative. It’s called on-demand pay. Basically it means you can get the money you’ve earned before your usual payday. It’s not money in addition to your salary, it is your salary – you’re just getting some of it sooner.
On-demand pay isn’t a loan either, because you can only get a portion of the money you’ve already earned. Future earnings aren’t accessible. This safeguard helps keep our users financially safe.
You can get your earnings instantly into your bank account with just a few taps. There’s just a simple fee of 1% of the amount you transfer.
Any money that you take ahead of payday comes off your salary at the end of the month. If you’re interested in getting paid when you want, refer your employer and we’ll contact them (you can remain anonymous if you like).
The information in this article is for general information only. It does not constitute professional advice from Openwage. Openwage is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information in this document relates to your unique circumstances.