What is buy now, pay later?

Buy now, pay later sounds like a dream, but how does it work, and is it really as good a proposition as it seems?

what is buy now, pay later?
(Image credit: getty images)

You may have seen the Klarna adverts or been asked if you want to “buy now, pay later” while shopping online. Maybe your friends or relatives have started doing it… but you’re not exactly sure how it works.

Buy now, pay later (or BNPL for short) is a fairly simple concept: instead of paying at the till or online checkout, the BNPL provider pays the retailer for you. You then pay the provider back over several weeks or months. Providers include Klarna, Clearpay, Laybay, plus PayPal’s Pay in 3 product.

It can be a completely free way to borrow money. There is normally no interest or fees to pay, as long as you make your repayments on time. However, it can be tempting to overspend with BNPL, and you may incur fees and a black mark on your credit report if you’re late with payments.

The use of BNPL nearly quadrupled in 2020, as the pandemic drove online shopping. The industry is worth £2.7 billion, with 5 million people using these products since the start of the pandemic, according to the Financial Conduct Authority (FCA).

While BNPL is popular with younger generations, it is also gaining traction among older people. Klarna’s average user is aged 33, while its fastest-growing demographic is 40-54 year olds.

How does buy now, pay later work? 

Retailers tend to work with particular BNPL providers. For example, Marks & Spencer works with Clearpay, while Klarna has partnerships with thousands of retailers including Made.com and H&M. Klarna also recently launched an app, allowing customers to shop at any online store.

This means if you want to buy something online, you could either purchase it directly through the retailer’s website – and use whichever BNPL provider is offered – or use an app like Klarna’s.

When you apply for BNPL, the provider checks your credit file before approving it – but it only does a “soft search”, meaning no other lenders will see you've applied for that credit. Shoppers receive a credit limit from a BNPL provider, based on their credit rating, affordability and its own algorithm. 

There are normally several payment options. For example, you could spread the cost into a series of instalments. The first payment is made at point of purchase, with the remaining instalments scheduled over the coming weeks or months. Or you could avoid paying anything on the day of purchase, and make the full payment later.

The payments are taken automatically from your card or bank account, so you don’t need to remember to manually make them.

Where can I use buy now, pay later? 

Thousands of retailers accept BNPL. Many of these are focused on clothing, although sectors like gardening, homeware and toys increasingly accept it too. When shopping online, it’s quite easy to see the BNPL option. When in store, you simply need to ask at the checkout if you can pay using this method. 

There has been a huge rise in BNPL over recent years. This has arguably been down to a trio of factors: a surge in online shopping, millions of people struggling during the coronavirus crisis and turning to credit, and clever marketing by BNPL providers using social media influencers and glossy adverts to make it look easy and affordable.

Some of this advertising has come in for criticism, and some has even been banned. For example, in December 2020, an influencer campaign by Klarna was banned by the advertising watchdog after Instagram posts were found to be encouraging people to turn to its credit service to cheer themselves up during lockdown.

Is it regulated? 

It is currently unregulated, although the FCA says it wants to regulate the products as a “matter of urgency”. The government is consulting on proposed rules this summer and will then look to put them into legislation. 

In February 2021, the FCA said: “The emergence and expansion of unregulated BNPL products gives consumers a significant alternative to more expensive credit, but this also comes with significant potential for consumer harm. For example, more than one in ten customers of a major bank using BNPL were already in arrears.” Anyone in arrears could be racking up late fees and getting themselves into serious debt.

Once BNPL is regulated, providers will have to clearly explain to customers how a product works, and what happens if they don't pay the money back. They will also have to do extensive checks to ensure customers can afford repayments – just like when you apply for a credit card or loan. This means the number of people being approved for BNPL will likely decrease in future, and shoppers may see their credit limits fall too.

As part of the regulation, unhappy BNPL customers will be able to complain to the financial ombudsman.

How do providers make money if they don’t charge interest or fees? 

BNPL providers make money by taking a cut from the retailer, rather than the customer. Providers argue that if a retailer offers a BNPL option it can significantly boost its sales. They may also make money from late fees, when customers fail to make their repayments. 

What if I can’t pay later? 

The repayments are taken automatically from your bank account, but if there isn’t enough money in your account, you may be charged a late fee. These fees can range from £6 to £12, although Klarna does not charge any late fees. Depending on the provider, the fees may be capped at a certain level like 25% of the order’s cost. But watch out, as you can be charged several late fees per transaction.

Missed payments may harm your credit score, and any debts could be passed on to a debt collection agency.

If you know you’re going to miss a payment, the important thing is to contact the BNPL provider in advance. They make be able to give you extra time to pay, or help you make a repayment plan.

What are the pros and cons of buy now, pay later? 

Pros 

  •  It’s an easier way to get credit than a credit card, overdraft or loan
  •  It’s quick – you just apply as part of the shopping transaction  
  •  It means you’ve got longer to pay off the full cost, which might help with cash flow 
  •  In some circumstances, you only pay for what you keep – for example, if you opt to make the full payment via BNPL in 30 days’ time, and then return an item, you won’t have to pay for it  

Cons 

  •  It can be tempting to overspend if you don’t have to pay straight away 
  •  If you can’t repay, you could incur late fees and a black mark on your credit file 
  •  A 0% credit card or 0% overdraft could be a better option, plus they are regulated, so you can go to the ombudsman if something goes wrong 
  •  You lose valuable consumer protection – even if you use BNPL with your credit card, you won’t be able to use Section 75 (which means your credit card provider refunds purchases over £100 when there’s a problem, such as faulty or non-delivered goods)