Buy now, pay later. For many of us, these are the four magic words we want to hear as we put yet another item in our shopping cart 🛒
With a rise of online shopping and the convenience of one day deliveries, it might be very tempting to buy something and pay for it… later.
As the number of retailers offering installment payments grows, using such payment methods might seem an attractive option in the short term. However, it also comes with a risk of trouble in the long-run.
Here at Plum, we’re all about promoting ways to manage your finances well and use your credit card responsibly, so this time we dive deeper into the buy now pay later concept and everything you need to know about it.
How does buy now pay later work 🤔
The concept of buy now pay later (BNPL) is quite straightforward: if you choose it as your payment option, you can either delay the whole bill for a later date or split the cost into equal interest-free instalments.
In the UK, there are various operators offering BNPL services, such as Klarna, Laybuy, Clearpay and others. Retail or high-street stores might also have their own later payment options available or offer layaway (that’s when you pay a part of the price upfront and pay the rest overtime). However, with a layaway you only get the item once you’ve paid the price in full.
According to research conducted by WordPay, buy now pay later is the fastest growing payment method in the UK. It’s growing twice as fast as bank transfers and is a popular choice among millennials, who are known for being wary of using credit cards 💳
If you decide to use one of the pay later providers, depending on the operator and the payment method you choose, they might check your eligibility to do so by carrying either a soft or hard credit check on you. It means that a BNPL operator might check your credit information available on the credit bureaus to make a decision.
What does buy now pay later cost 💰
This is the part where things can get tricky 🐙
Very often the terms and conditions of using BNPL services include making a minimum monthly payment. In general, if you make your payments on time, you won’t pay any interest or incur any additional payment fees.
However, missing your payment dates can come at a high cost 💸 BNPL operators might charge interest or you may incur a fine for missed or late payment, depending on their terms and conditions.
Very often the interest rates for pay later services are higher than a credit card, for example.
Because the charges might vary from operator to operator, it’s essential to read the terms and conditions or FAQs before you buy anything using pay later services, as there might be some important little details there 🖋
Does buy now pay later affect credit score? 💳
We’ve talked before about the importance of building a healthy credit score, and this is especially relevant if you’re using a buy now pay later scheme.
BNPL is a form of credit agreement, so the way you use it can have an impact on your credit score. In effect, you’re borrowing the price of the item for the duration of the repayment period.
If you fall behind on payments, it can affect your ability to obtain credit from other lenders in the future. Missed payments might also result in a record on your credit report that, in consequence, can also have an impact on any future credit limit available on your credit account.
The impact of this is that you might find it difficult to be approved for credit in the future, when trying to take out a mortgage or a loan. Worth bearing in mind if you’re dreaming of home-ownership sometime soon in the future 🏡
In addition to a record on your credit report or being charged late fees, if you fail to pay up, your details could be passed to a debt collection or credit reference agency... and that’s not a conversation you want to have 💼
Nonetheless, if you proceed with caution and use BNPL services responsibly (and make your payments on time), they could actually strengthen your credit score. Pay later services might even come in handy if there are only a couple of days left till payday and you find yourself in need of essentials.
The use of buy now pay later services among millennials 🤳
In the UK, up to 10 million people used pay later services in 2019, according to the research done by CompareTheMarket. Among them, millennials are most likely to have used pay later services.
However, using pay later services does come with a price tag. Money.co.uk found that, on average, millennials in the UK owe around £200 on buy now pay later schemes, which can become a cause of financial stress.
It’s therefore not surprising that the pay later services can be seen as the new debt trap for millennials.
The concerns about buy now pay later services 👀
In addition to the immediate financial consequences, there are also worries about the psychological effects of BNPL.
BNPL payment plans offer the convenience and ease to make impulse purchases 🛍 And they could also encourage you to buy more than you can actually afford to repay. While three payments of £30 might seem less intimidating than one big chunk of £90 from your bank account, it is the same amount of money after all.
Also, when it comes to assessing our financial situation, we tend to look at things through our rose-tinted glasses from time-to-time.
While we might be struggling to make ends meet now, we tend to think that our financial situation will change next month. If you find yourself regularly using a BNPL service without a financial safety net in place, it means that when the unexpected inevitably does happen (which it always does eventually), you can easily find yourself in problem debt that can quickly turn into a worry that keeps you awake at night.
What to do if you’re struggling with debt 🤗
If you do find yourself struggling with debt, take a deep breath and remember that no debt problem is unsolvable. When it comes to debt management, the secret lies in making a plan and sticking to it.
It is also worth checking what additional help is available to you. For instance, some companies might allow you to delay payments or take a payment deferral. This way, your credit rating will not be affected.
If you find yourself habitually using your overdraft as a result of overspending, then there are also steps you can take to help break the cycle. A money management app like Plum can be configured to help you set money aside with the specific intention of paying back your overdraft.
However, if your debt has become too overwhelming or unmanageable, it’s always recommended to seek independent debt advice from a specialist debt advisor. You can get more info from Citizens Advice.
If you'd like to learn more about Plum then you can check out our website.