Iona Explains... Buy Now, Pay Later

We've teamed up with financial writer, author and Young Money Blog guru Iona Bain once again to take a closer look at Buy Now, Pay Later (BNPL) services.

Iona has created a handy guide with everything you need to know about BNPL which you can watch below! Or, read on to get all the information you need.

What is Buy Now, Pay Later?

It's a service that is offered by most big retailers which does exactly what it says on the tin, it allows you to purchase one or more items without having to spend money right away, with an agreement to pay the cost at a later date.

It's usually operated by a separate company to the retailer. Some examples in the UK include Klarna, Clearpay and Laybuy.

How does BNPL work?

BNPL is a type of credit, which means you're being leant money. If you buy something worth £30 using BNPL, you are borrowing that money from the firm offering the service and agreeing to pay them back.

You would only pay for items you keep, so if you bought three items of clothing costing £10 each and returned two of these, you would only pay the £10 for the item you've kept.

Sometime, you will be offered the option to split your payments into monthly instalments so you do not have to pay it all back at once but would agree to pay a fraction of the cost each month until it is fully paid off.

What are the pros?

BNPL is marketed as a cheaper, easier more flexible alternative to credit cards.

One reason for this is that the money you borrow is interest-free, this means that the amount that you borrow to pay for something is the same amount you will pay back.

If you borrow money in the form of a loan from a bank, or use a credit card, there will usually be a rate of interest attached to it. If you borrowed £100 with an interest rate of 8% then you would need to pay back £108. With BNPL, you don't have to worry about that.

Another pro with BNPL is that there is no 'hard credit check' when you use it. A credit check is when lenders look at your credit history to get an idea of your borrowing habits in the past, these can be 'hard' or 'soft'.

Hard credit checks appear on your credit report and if there are too many of these checks in a short space of time, it can damage your credit rating which affects your ability to borrow in the future.

A soft credit check does not appear on your credit report, and this is what BNPL firms usually use.

In summary, if you pay back what you owe on time then BNPL can be a low-cost and easy way to borrow small sums of money.

What are the cons?

Not all BNPL firms are the same, they will have their own set of rules which you have to follow otherwise you may end up facing late-interest charges.

So, if you missed one of your agreed payment dates the firm may end up charging you extra for this and may log the missed payment with a credit reference agency which would harm your credit report.

If you don't pay back what you owe, lenders will use a debt collection agency. Their job is to get money back from you which you owe and they'll go to great lengths to try and do this.

Should you use BNPL?

There are a few things to consider if you're thinking about using this service.

It's a good idea to pause when you get to the checkout and think about what you're buying. Do you need what you are buying and can you afford to pay for these? It may be a good idea to leave your cart for a while and come back to it later and see if you still want to make your purchase. This will help prevent you from making impulse buys.

Start budgeting your money so you know exactly what your limits are for spending and what you will be able to afford to pay back if you use BNPL. Check out our step-by-step guide to making a budget to help you get started!

If you know that you have enough money to pay back what you owe and have budgeted for this, then using credit to buy something becomes less risky and may be the right option for you. However, it shouldn't be a substitute for getting into good shopping habits and budgeting well. 

What to do if you decide to use BNPL

Make a very clear note of any dates when you are due to make a payment and keep that somewhere visible. Pop it in your calendar, put a note on the fridge or write it on your forehead if need be!

Forgetting to this could have a big knock on effect as missing payments may lead to extra charges and can harm your credit score.

Make sure you're getting any contact from the BNPL firm. Check emails aren't going into a spam folder and if you have received any calls or texts from them as they may send you important information or reminders about your payments.

Keep the amounts relatively small and make sure you can budget for it, borrowing a large amount of money is more risky as you could encounter an unexpected cost which you hadn't budgeted for which affects your ability to pay back the BNPL firm. It may be a good idea to set this aside and not touch it until your payment date.

More information

You can find more information about BNPL and what to look out for when using it on the Money Saving Expert site.

Find more information about managing your money on our Money & Me page.