Buy now pay later: What you need to know header image

Luke Furnell, Starling Product Manager, shines a spotlight on “buy now, pay later” products.


“Buy now pay later” (BNPL) products have grown massively in popularity in the past year, boosted in part by the shift to online shopping, resulting from the pandemic. Used wisely, they can provide a convenient way for shoppers to manage their finances and obtain credit. But users unable to make their payments run the risk of falling into debt and incurring late fees. Here we outline the basics of BNPL.

BNPL allows you to buy something now and pay for it at a later date. For example, you might be offered the chance to split the cost of something into three with an initial payment upfront, a second after 30 days and the third after 60 days. Alternatively, you might pay nothing initially and pay the full amount a month later. 

The ability to spread the cost of a retail purchase over a period of time, or delay the payment, is very convenient. But it’s worth remembering that BNPL is a credit product, not a payment technology that makes it simpler for you to pay. If abused, it can lead consumers to overspend and/or spend impulsively. In part, this is due to how the product is sometimes presented to customers online.

New providers are emerging all the time. Current BNPL providers include Clearpay, Klarna, LayBuy, Openpay and Paypal - pay in 3.

How buy now, pay later is presented online

The benefits of BNPL are often presented before the item has been added to a basket. The benefits of deferred payments and ‘no fees’ are often pointed to. The item can seem more affordable when customers are told that payment can be split over multiple months. Placing BNPL alongside other debit options can make it confusing to customers, as the true implications of using BNPL might not be clear.

BNPL providers often take a proportion of the sale that the retailer makes. BNPLs market themselves to retailers by explaining that customers spend more when they use BNPL, than they otherwise would. What’s best for customers might not necessarily align with what’s best for BNPL providers.

How buy now, pay later can be used to manage your money

Customers use BNPL for different reasons. Some use it to try retail goods before they fully commit to the purchase. Others find it useful for emergency purchases. Some customers really like that they can purchase the goods, regardless of the time of month.

BNPL can be useful to customers, but it’s worth bearing in mind that you’ll always need to repay the money.

How buy now, pay later providers decide whether to give you credit or not

BNPL providers normally run a soft credit check and look at the previous repayment history of a prospective borrower. Bear in mind that a BNPL provider can run a ‘hard credit check’ on you when you take out this credit. A hard credit check will show on your credit report and can prevent you getting credit with other lenders.

Buy now, pay later - to be regulated

In February 2021, the government announced its intention to bring BNPL agreements into regulation under the Financial Conduct Authority. Because BNPL is unregulated for now, it doesn’t benefit from some of the same protections that a regulated financial product does. For example, the ability to refer complaints to the Financial Ombudsman Service (FOS). 

What you need to know about late payments and missed payments

Setting calendar reminders can be a useful way to help ensure that repayments are not missed. BNPL providers such as Klarna provide you with reminders of upcoming payments and allow you to snooze payments, giving you longer to pay. Before taking out the credit, it’s important to check the terms and conditions for key information on late payments and missed payments.

Bear in mind that late payment fees can be high. Some providers charge a late fee that can increase with order value and is capped, others charge a consistent amount which accumulates if it takes you longer to make the repayment. Others just charge a one-off fee.

Some BNPL providers report late payments and defaults to Credit Reference Agencies (CRAs). If you miss a payment or fail to pay back what you owe, it can appear on your credit report, which can remain for six years. This can make it more difficult for you to obtain credit in the future.

The above article is intended as general information and does not constitute advice. You should take independent advice if you have any questions about your specific circumstances.

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