How Does Buy Now Pay Later Work?

Buy Now Pay Later (BNPL) is a type of short-term financing that has become very popular. 

Some of the biggest UK companies in the BNPL sector are Klarna, Curve Flex, and Laybuy. PayPal, which recently debuted its own Buy Now Pay Later concept, has also joined the list of top companies. 

Another popular BNPL provider is Flava, where you can buy food and groceries online and make your first payment at the time of purchase, with the balance paid over in three weekly instalments. 

Let's look at how Buy Now Pay Later works, what the benefits are, and how it affects your credit profile.

How does Buy Now Pay Later work?

With BNPL, you can spread the cost of your purchases over a specific period of time—typically weeks or months—instead of paying the whole purchase amount at once.

You pay off the costs of the purchase in regular intervals, usually fortnightly or month­ly. Buy Now Pay Later is being used more often for online purchases worldwide as it allows people to purchase an item immediately but pay it off, without having to take out a personal loan to cover the amount.

Another great benefit of BNPL is that you usually don't pay any interest or charges on the amount if you stick to the payment agreement. If not, a late payment fee or other additional charges may apply.

Buy Now Pay Later can be a practical approach for most people to spread the expense of their purchasing. However, in the UK, almost one-third of shoppers who use BNPL say that their repayments have become unmanageable and have pushed them into debt. 

However, as the sector expands, there are more people voicing some concerns. Some fear that people are spending more than they can afford, leading them into a debt spiral. 

What does BNPL cost?

In general, you won't incur interest if you pay back the whole amount of what you purchased within the grace period. This is because there is typically no interest at these times.

When using the Buy Now Pay Later option wisely, you can put off paying for something for several months or even a year without accruing any interest. If you pay off your debt before your delay period expires, even if it's just the day before, many large companies won't charge you any interest.

Alternately, some programs let you spread the cost out over a longer time frame, but a high rate of interest, often up to 39.9% APR, may be applied.

Should I consider BNPL?

A Buy Now Pay Later arrangement can be a good option if you want to spread out the cost of purchases over several months or weeks. However, there are a few things you should consider:

Think about your repayments

BNPL is often promoted as the simplest method of payment at the checkout.

The transactions are often so seamless that you may not even realise you've signed up for a Buy Now Pay Later option. Sometimes providers will offer you further discounts to encourage you to pay with BNPL.

The implication of this is that you might not give yourself enough time to consider whether you need what you're buying and how you're paying for it, or you might be persuaded by discounts to buy something you don't actually need.

Read the terms

When you make a purchase, especially online shopping, it's possible that the fine print regarding what you're signing up for is hidden elsewhere on the website.

This especially occurs if you are presented with a selection of BNPL products at the checkout., It may be challenging to determine which repayment plan you have selected or whether it is the ideal one for your needs.

You should be aware of the hazards associated with borrowing, as with any credit product.

To avoid merely checking a box without reading the terms and conditions, make sure to search for them and then double-check them.

If you don't, you won't know what will happen if you forget to make a payment or are no longer able to afford the monthly payments.

How merchants make money

Instead of the customer, the firms profit from the retailer.

Most Buy Now Pay Later services take a percentage of anything the shop sells with their assistance.

Retailers are informed by providers like Klarna, Clearpay, and Laybuy that by using their services, they may raise the average basket value and improve sales.

The more money people spend, the more money the BNPL corporation makes.

In the UK, more than half of the top online retailers have BNPL payment options.

Does Buy Now Pay Later affect my credit score?

When you apply for Buy Now Pay Later credit, most companies run a soft credit check as part of their affordability checks. The results of these soft credit checks won't impact your credit score.

However, BNPL providers can alert credit reference agencies about missed payments. So, your credit score may be negatively impacted if you miss monthly instalments or make late payments.

If payments are consistently late, some businesses may send unpaid bills to a debt collection agency, harming a borrower's credit report.

What if I miss a payment?

If you don't make your payments on time, you can incur a penalty fee (as with LayBuy, ClearPay, or PayPal Pay in 3), or the payment might be rolled over to the following payment as with Klarna.

Some BNPL providers will transfer your debt to a debt collection agency to recover payments if you are still unable to make payments.

As a result, it's critical to get in touch with your BNPL provider and explain the financial circumstances that lead to your missed monthly instalments. Most of them will try and work with you to find a solution. 

Why am I not eligible?

Because of the way Buy Now Pay Later operates, it is somewhat seen as credit because you are borrowing the item's purchase price. This means that before choosing whether to approve your application, Buy Now Pay Later companies might check your credit score.

Buy Now Pay Later credit is probably not available to you if your credit is poor. 

Before submitting an application for Buy Now Pay Later, you should first check your credit score to see if there are any issues you can resolve to improve your credit rating.

Alternatives to Buy Now Pay Later

When used properly, Buy Now Pay Later can be a simple way to get something without having to spend money right away. But you might also achieve this in other ways.

For instance, you may apply for a credit card that offers interest-free financing on purchases, which would allow you to spread out the expense of buying things over several months without paying any interest.

A credit card has the advantage over Buy Now Pay Later in that it can be used at many stores, online and offline, allowing you to spread out multiple purchases, not just one.