How does Buy Now, Pay Later Work?

What is Buy Now Pay Later (BNPL) and how does it work?

BNPL is a type of finance/credit agreement where the buyer of an item (in-store or online)can purchase something now and then pay for them later or via a monthly payment plan.

With Buy Now Pay Later shopping, there is a delay period of between thirty days and twelve months during which interest-free payments can be made. Terms vary depending on the BNPL provider, but customers usually have the option to make all payments during this interest-free period (usually up to a year); very rarely do people pay it off after this period is up, as, of course, there will be interest to be paid on top. Some BNPL deals will let you spread the cost of your purchase over a longer time, but be careful with this as high-interest rates are likely to be charged on top. 

With Christmas looming, this could be welcome news for shoppers looking for gifts online. However, care must be taken as BNPL can prove quite expensive when compared with other forms of credit – it all depends on the deal you get and what provider is lending to you.

Where the agreement includes a delay period (interest-free), a lump interest sum may be added to the principal sum borrowed if you do not pay it back within this period. If the debt is not cleared within this time, a settlement fee may also be added to the debt as well as the interest. However, especially with the increase in online shopping, BNPL takes away the inconvenience of waiting for refunds on returns.

Firms are also required to explain BNPL deals clearly to customers and prompt them before the end of the delay period to avoid unexpected charges and interest. 

Buy now pay later finance providers

BNPL is usually financed by providers who specialise in this type of lending as part of their portfolio. Some of these providers are subsidiaries of retailers; others are independent and deal with specific companies only; for example Klarna is in partnership with companies such as H&M, Halfords, River Island, Ann Summers, Asos, and Clarks among others. Other examples of such companies are:

• Fintech
• Clearpay
• LayBuy
• PayL8r 

More versatile, alternative options to BNPL providers would be credit cards and bank loans. These could work out cheaper as some credit cards offer competitive 0% interest periods as opposed to the usually high-interest rates BNPL providers charge. Credit card purchases of between £100 and £30,000 also come with the protection of Section 75 of the Consumer Credit Act 1974.

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Does buy now pay later affect your credit score (uk)?

While BNPL may be convenient and helpful for emergencies, the application for a buy now pay later agreement involves the provider carrying out credit reference checks and the final stages of this will usually, but not always, leave a footprint on an applicant’s credit file. Despite this, it shouldn’t have a drastic impact on your credit score.

Those with poor credit are less likely to be accepted for BNPL purchases, but there are providers out there who may offer tailored plans for those with a low credit score – in most cases, they will come with high-interest rates to account for the risk that consumers with low credit scores pose. It’s also worth remembering that too many applications for credit within a short period of time can be seen by other lenders on your credit file, and they may see this as a sign of desperation, so try to avoid doing this – only apply for a deal that suits your needs.

It is always worth checking your credit score if you’re unsure, including the criteria that potential lenders use before making a BNPL application. Like with all types of debt, for any missed payments on buy now pay later, ‘bad credit’ ensues and your credit score will go down.

For those wondering: “I’m on a debt solution can I use buy now pay later?”, such customers will most likely be seen as a high risk by any lender, especially as the debt solution process involves missing payments, and will more than likely not qualify for BNPL.

Credit reporting stays on credit files for six years and can affect future credit decisions, so if you do apply for a BNPL plan, ensure you pay your repayments back on time and do not miss any, as this can help improve your credit score.

While BNPL can be helpful, it is to be used with care and is certainly not for everyone.

To learn more about your credit score and report, visit Checkmyfile, a multi-agency credit-checking website that can show you what information is held on you by all the four main credit reference agencies in the UK. Get started with your free trial now by tapping the button below. Alternatively, read our related articles for further information.

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