If you are a few days from payday and need to buy something urgently, buy now, pay later credit can be a lifesaver. However, not everyone considers the implications of using it – or how it could affect their finances.
What’s buy now, pay later?
As the coronavirus pandemic has prompted a huge pivot to online for many retail businesses, buy now, pay later (BNPL) schemes like Klarna and Clearpay have exploded in popularity – but what are they?
Buy now, pay later essentially does what it says on the tin: it’s a line of credit that lets you make a purchase immediately, but pay a short while later, or even spread the cost over a fixed period of time.
If you choose to pay later, your payment will be taken after a set period of time (usually thirty days) rather than straight away, whereas if you choose to spread the cost, you’ll usually pay the first instalment at the checkout, and then the balance in two or three equal monthly instalments afterwards.
Pros: Spreading the Cost before payday
If you’re a couple of days away from payday and need to make a purchase, and you’re sure that you’ll be able to cover the balance when it’s due – or if you want to spread the cost of a high-ticket item – a buy now, pay later scheme might be the most effective way to borrow. It also cuts out the long wait for a refund on returned online purchases, which can help with your cash flow.
Their checks don’t usually leave a mark on your credit file (this varies for some products, so make sure you read the small print), approval is instant, and there’s usually no interest to pay, meaning that they can be easy and convenient to use every now and again.
Cons: They’re not regulated by the FCA
It’s worth remembering that money owed on a buy now, pay later agreement is still a formal debt, and there are consequences if you can’t pay on time. Some providers charge a £6 late fee for each late payment, and repeatedly missing payments can affect your credit file, leaving a long-lasting mark on your financial record.
Buy now, pay later schemes are not currently regulated in the U.K., but are under review by the FCA, so it’s worth being aware of the risks before you use them. Treat them like you would any other form of credit.
Before you use a buy now, pay later scheme, consider the following:
Here are a few questions you might want to ask yourself before using buy now, pay later:
- Do I really want this item, or am I just buying it because I can use buy now, pay later? Would I buy it with cash?
- Am I sure that I’ll be able to pay this back, on time?
- Can I be certain that this won’t become a habit, or a spiral? Make sure that you’re not jeopardising your financial wellbeing by opening a Pandora’s box of credit.
- Buy now, pay later schemes can be a convenient, interest-free way to finance big or urgent purchases.
- It’s important to remember that buy now, pay later debt is still real debt, with real consequences if you don’t pay on time.
- Always go into a buy now, pay later agreement with your eyes open, ensuring that you can afford the repayments.