What is buy now pay later (BNPL)?

Buy now pay later products, often referred to as BNPL, allow you to purchase something without paying for it up front.

These products are a form of borrowing. You borrow money to pay for your items and then pay them back later. It’s important to note that some buy now pay later products are unregulated, although the government has announced that regulation will be introduced for these in 2023.

On this page, we’ll look at how buy now pay later usually works and the impact it may have on your credit rating. 

How does buy now pay later usually work?

Buy now pay later products typically work in the following way: 

  1. You buy something (usually online but not always)
  2. You borrow money for part or all of that purchase
  3. You repay the money borrowed (plus interest and fees, if applicable)

The main benefit of this process is that you'll normally pay back the money you owe in regular instalments, spreading the cost of your purchase over several weeks or months. Some buy now pay later products usually offer an interest-free or fee-free period depending on the length of the plan. It may be possible to flex the length of this but it’s important to note that longer plans may charge interest or fees.

Before taking out any buy now pay later product you should understand the terms of your borrowing and how much it will cost you. 

Remember, with buy now pay later, you simply spread the cost over time. You're not making your purchases any cheaper.

Is using buy now pay later a good idea?

There are occasions when using buy now pay later products can be both helpful and convenient, if managed correctly. For example, making expensive purchases like furniture more affordable by spreading the cost over several months so you’re not paying a large lump sum that could wipe out most of your monthly budget in one go. 

Buy now pay later is a form of borrowing and there could be extra fees and consequences if you fail to keep up repayments, including a potential negative impact on your credit score. For that reason, it’s essential you assess whether buy now pay later is the right option for you. Ask yourself the following:

  • Is this an impulse buy? – Think about whether you can afford the item and how much you really want or need it. 
  • Savings – Could you use your savings  to cover the immediate costs rather than borrowing money? Or could you simply save for a few months instead?
  • Could you use alternative borrowing? – Other types of borrowing may be repaid over a longer period, giving you more time to spread monthly payments. Just be sure to check the interest rates and fees of every option first.

There are a few things to be aware of before deciding whether buy now pay later is right for you:

  • If you are going to apply for a buy now pay later product, make sure you have worked out whether you can afford to pay it off, so you don’t end up missing payments and having financial difficulties. 
  • When using buy now pay later, you may not be covered by Section 75 of the Consumer Credit Act. Section 75 gives you protection when using certain products such as a credit card on most purchases over £100 and up to £30,000 if goods are faulty, not as described or you don’t receive them.
  • Buy now pay later products may not be covered by the Financial Ombudsman either, so you wouldn’t be able to get their help in resolving any complaints.

You should check your terms and conditions to check whether you are covered under Section 75 and by the Financial Ombudsman.

How does buy now pay later affect your credit score?

While it may not seem that way, buy now pay later is a form of borrowing, which means it could impact your credit score.

At the moment it isn’t always reported to credit reference agencies.

It’s important you know what this means for you. If your buy now pay later product is reported to the credit reference agencies and you manage it well, this could improve your credit score. However, if you miss a payment, it could negatively impact your credit score.

With the use of buy now pay later products increasing and increased regulation on the horizon, it’s likely to become mandatory for them to report buy now pay later lending to the credit reference agencies. It’s also more likely a full credit check will be carried out when you apply. Too many full credit checks in a short space of time may negatively impact your credit score and make it harder to borrow in the short term. So, it’s a good idea to avoid taking out multiple buy now pay later products in a short period.

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