Buy Now Pay Later – Is This Good or Bad Debt?

BNPL

You’re wincing at the price of those ASOS joggers, but you really want them. You know how good you’ll look in your Instagram lockdown selfies, and that soft, blue velour is the perfect motivation for your morning jogs.

But the logical side of you kicks in and starts pulling up mental images of rent payments and electricity bills. You sigh, about to shut down the browser. Then you see that you don’t have to pay all at once. The web-page tells you that with Clearpay, a Buy now, Pay later scheme, you can split your payment into four manageable instalments, interest free.

Buy now, Pay later schemes (BNPLs) – a largely unregulated form of lending – are booming in the UK, popping up everywhere on online retailers, from Boohoo and Etsy, to Amazon and Missguided. BNPL firms advertise themselves as an easy way to delay paying for something you want, now, without paying interest. However, late payment fees can crop up quickly, and missed payments can damage your credit score. BNPL schemes encourage you to spend more because it feels as though you’re paying less. This can be a fast route into financial trouble, and you may end up having to deal with debt through an IVA, or even bankruptcy.

In this article, we’ll explore how BNPLs work, the potential dangers of BNPLs, how to use BNPLs sensibly, and what to do if you can’t pay off your BNPL debts.

Is Buy now, Pay later good or bad debt?

Buy now, Pay later schemes are a bad form of debt for the following reasons: they are mostly unregulated by the Financial Conduct Authority (FCA) so if you feel you were lent money irresponsibly, you can’t complain or get compensation, and although Buy Now, Pay later schemes offer interest free borrowing, it is easy to miss payments and get charged high late fees, which could affect your credit score.

Buy now, Pay later schemes are also a bad form of debt because many firms don’t do proper credit checks to see if you can pay something back without getting into financial hardship, and the schemes encourage you to make purchases that you usually wouldn’t, for example, Klarna entice customers to spend 55% more than they ordinarily would.

What is Buy now, Pay later (BNPL)?

Buy now, Pay later or BNPL is the name for any credit scheme that allows you to purchase things but pay for them either at a later date, or in instalments. Although BNPLs have technically been around for years, newer BNPL companies like Klarna, Clearpay, and Laybuy are becoming an integral part of the online shopping industry, as they allow shoppers to buy goods without having to hand over the full amount straight away.

How do BNPLs encourage you into debt?

BNPLs typically come across as innocent, because they offer interest-free borrowing for a time. In theory, if you make all your repayments on time, you win. You can delay paying for that Swarovski Infinity Heart bracelet you bought for your best friend’s birthday until your pay cheque rolls in, and you haven’t paid a penny in interest.

But like all practices that get us to spend more, BNPLs can be psychologically manipulative.  There’s a reason that BNPLs like Klarna and Clearpay are so ubiquitous on the websites of online retailers like H&M, Missguided and Gymshark. Klarna themselves say that almost half of shoppers went through with purchases that they wouldn’t ordinarily have done, because Klarna was an option at checkout. Think about the amount of times you’ve lusted over an item that you know you can’t really afford, and placed it in your basket to ‘think about it’, because that gives you a feeling of owning it, without the pain of paying? According to its own research, Klarna can convert 44% of users from thinking about an item, to purchasing it. We prefer to pay through, for example, Klarna or Clearpay because their schemes allow us to pay smaller amounts over a longer period of time, despite the fact that it’s a debt, and we’re essentially in bondage until the debt is paid. And those ‘small’ instalments add up quickly, especially when they start leaving your account every week.

It doesn’t help that, visually, adverts for BNPLs like Klarna and Clearpay blend (with their bright, block colours and perky fonts) so well into the background of online retailers’ websites, so that they look like a natural part of the process of buying something fun. BNPLs feel miles away from the grim world of debt collection and default notices, and yet if you miss payments, you may be charged late fees, and your debt will be passed on to a debt collection agency.

Main types of Buy now, Pay later

The Buy now, Pay later industry is booming, and the BNPLs dominating the market at the moment include:

  • Klarna. Klarna are a firm who offer three different types of BNPL schemes. The first is called Instalments (or ‘pay in 3’), and allows you to split purchases into 3 payments every 30 days until the amount has been paid off. Klarna also offer a Pay in 30 days option, where you can delay paying for your purchase for 30 days, interest free, and a Financing option, which offers a longer term BNPL period of between 6-36 months. Klarna is currently the most valuable Fintech start up in Europe, which shows how lucrative the BNPL industry is.
  • Clearpay. BNPL scheme Clearpay only launched in the UK in 2019, but it is booming. Google trends data shows that it is rapidly catching up to industry leader Klarna, with a 56 search value to Klarna’s 62 from December 20-26th 2020. Cleapay offers customers instalment plans, where a purchase is paid for in four instalments (called ‘paying in four’), with payment taken every 2 weeks.
  • Laybuy. Laybuy allows you to split payments into six instalments, which will be automatically taken out each week on a payment day that you choose,
  • PayPal Pay in 3: PayPal’sPay in 3 option rivals well established BNPLs like Klarna and Clearpay, by allowing users to pay for items in three, interest-free instalments. PayPal’s Pay in 3 scheme is very likely to dominate the BNPL industry soon, given that PayPal’s availability as an alternative payment is 89% across retail transactions, as opposed to Klarna’s 6%, according to research by Tech Crunch.

We’ve created a table where you can find all the information you need on the BNPLs above, including how they will affect your credit score and how much they charge in late fees and penalties.

We’ve created a table where you can find all the information you need on the BNPLs above, including how they will affect your credit score and how much they charge in late fees and penalties.

BNPL What does it offer? Late fees and penalties Credit checks Effect on credit score
Klarna You can split purchases into 3 interest free instalments, with payments taken every 30 days, or delay your payment for 30 days. Klarna’s Financing option allows for BNPL periods of 6-36 months. Claims no late fees even if you don’t pay (in the UK), but will pass debt on to a debt collection agency. A soft credit check when you apply for Klarna’s Instalments or Pay in 30 days, and hard and soft credit checks for Klarna’s Financing scheme. A hard credit check will show on file to other potential lenders, and may negatively impact credit score. Claims no bad effect on credit score for Instalments or Pay in 30, if you fail to pay. However, many people have complained of negatively affected credit scores, and a Compare The Market study predicted 2 million may have damaged scores through missed payments. Missed or late payments for Klarna’s Financing scheme will negatively affect credit score.
Clearpay You can pay for purchases in 4, interest free instalments. Payment taken every 2 weeks. Late fee of £6 if not paid by 11pm the following day after first missed payment. A further fee of £6 if payment is not made within 7 days. Fees are capped at 25% of the item purchased. No credit checks, which could be dangerous if you already have an issue with debt. Be sure you can afford repayments before purchasing. Claims no bad effect on credit score, if you fail to pay. However, many people have complained of negatively affected credit scores, and a Compare The Market study predicted 2 million may have damaged scores through missed payments.
Laybuy You can pay for purchases in 6, interest free instalments. Payment taken each week on same day. Initial late fee of £6. If you do not make the missed payment within the next 24 hours, you’ll be charged another £6. Up to £12 in late fees for each missed instalment payment, up to a total of £24 per purchase. Debt may also be passed to a debt collector, which may harm credit score. A hard credit check, which will show on your credit file to other potential lenders. Too many checks negatively affect your credit score, as may signal financial difficulties. Missed payments will negatively affect credit score.
PayPal Pay in 3 You can pay for purchases in 3, interest-free instalments. Payment every month on same date. Late fee of £12 for overdue payments. A soft credit check when you apply for Pay in 3, which will not affect credit score. If you miss payments or pay late, this will negatively affect credit score. PayPal Pay in 3 say: “As a responsible lender, we will be reporting a customer’s performance to credit reference agencies”

 

It’s important to remember that BNPL companies rely on you spending more money through their platforms than you usually would while online shopping. Even if you make you payments on time within an interest-free period,  you could be losing money through the impulse buys that BNPLs implicitly encourage you to make, because paying in instalments feels more affordable. We don’t tend to think of the invisible financial losses we incur, the money we would have in our bank account if we didn’t overspend.

Why is Buy now, Pay later bad?

In this section, we’ll look at 5 reasons why Buy now, Pay later can be bad as a debt.

Unregulated by the Financial Conduct Authority

BNPLs are largely unregulated by the Financial Conduct Authority (FCA). The FCA is the organisation that makes sure all financial organisations, including lending and debt collection services, for example, credit card companies, are obeying rules that they have set out for fair practice. The reason that BNPLs don’t have to warn of risks is because out As Alice Tapper, founder of Go Fund Yourself and campaigner for the regulation of BNPLs says, when you apply for a credit card, you’re made fully aware of the risks and there long forms to sign and checkboxes to tick. Yet, because BNPLs are an unregulated industry, BNPL providers don’t have to explain what happens if you can’t pay.

Because BNPLs like Laybuy and Clearpay are unregulated by the FCA, lenders don’t have to follow FCA rules about doing proper credit checks. That means that even if you have an issue with problem debt and you have a poor credit score, you could still borrow with a BNPL and potentially get yourself into unaffordable debt, which can have a serious impact on your health and financial security.

Perhaps most concerning is the fact that you can’t complain to the Financial Ombudsman Service about BNPL products. The Financial Ombudsman Service deals with disputes over unfair lending or debt collection practices, and can check if a lender has treated you fairly. If the Financial Ombudsman feels that you’ve been treated wrongly, or lent money irresponsibly, they can force the lender to make amends, and even pay you compensation. This is particularly important when it comes to loans which were lent to you without the proper credit checks, for example, payday loans. The concern is that if you buy products on credit that you can’t pay back by a BNPL service, you won’t have the protection or recourse to complain.

As BNPLs are an unregulated industry, you don’t get protection under Section 75. Section 75 laws say that your credit card provider must give you protection on purchases over £100. So, if your purchases are never delivered or they’re faulty, you could get your money back. However, you don’t get Section 75 protection when there’s a ‘third-party payment processor’ involved in your purchase. So, if you’re not paying directly for goods from a retailer using your credit card, but through a system such as PayPal or BNPLs such as Klarna and Clearpay, you won’t get this protection. However, if you’re using PayPal’s Pay in 3 BNPL scheme, you’ll get PayPal Buyer protection, which will reimburse you for the full purchase price and shipping costs of any item, if your item doesn’t arrive or is damaged.

It is important to note that Klarna’s Financing scheme (which is a longer term BNPL scheme, as opposed to the unregulated BNPLs of just a few weeks) is regulated under the FCA, which also means it requires a hard credit check, which could affect your credit score. However, Klarna’s other products – Instalments and Pay in 30 days, are unregulated at the moment (Klarna says it welcomes regulatory checks), so make sure you know the difference between Klarna’s FCA and non FCA regulated products.

May damage your credit score

Like all debt, missing BNPL payments can negatively affect your credit score, which is why it’s important to think carefully about whether you can afford to pay back any debt you’re taking out. Because BNPLs may encourage you to spend more, because they break payments into smaller amounts to be paid back over a period of time, it can be hard to keep track of everything you’ve bought, and therefore how much money you owe, potentially pushing you more easily into unaffordable debt. If you fail to pay PayPal Pay in 3 and Laybuy on time, your credit score will take a negative hit, as well as that your debt may be passed to debt collectors and you’ll have to pay late fees, which will further impact your credit score.

Klarna and Clearpay claim that borrowing money on items with them never affects your credit score, and Klarna says that even if your unpaid debt goes to a debt collection agency, this won’t be reported on your credit file. Yet, thousands of Klarna and Clearpay customers have warned that their credit scores have been damaged by missing payments with these schemes. Online retailers like H&M still warn you that missing payments on Klarna could negatively affect your credit score, so be careful that you don’t develop a false sense of security when shopping with  BNPLs. 40% of shoppers weren’t aware that missing payments with BNPL schemes could harm their credit score, which shows just how dangerous unregulated sources of credit like BNPLs can be. Resolver, a consumer website and free online tool for independent complaints, reported 15,950 complaints about BNPL services in less than two years, including credit score damage through missing payments on small sums and being chased by debt collectors even after repaying debt.

We interviewed Alice Tapper, who told us: “the information out there on BNPLs and credit scores is extremely contradictory. Only a few months ago Klarna went on to the BBC saying that they would be reporting to credit agencies. They’re now telling some of their customers that that isn’t the case. There is clearly an issue of inconsistency here, which, when we’re talking about financial products is extremely worrying”.

Misleading information

As BNPLs are unregulated, they don’t have to let their customers know the risks of not paying, and because of this, BNPLs can partner up with retailers to give the impression that deferring payment is the savvy, modern way to shop and not what it is – debt.  2019 adverts for the online retailer Missguided promote Klarna as a payment option with no risk wording at all. The caption refers to “No interest. No fees. Ever”, which is misleading as one of Klarna’s products, Financing, does involve interest, and some of Klarna’s products in the US include late fees for late payments.

BNPLs often use influencer marketing to promote their credit schemes,but influencers may not use wording that warns of potential risks, or disclose that they’re being paid to promote something. Credit consumer expert Martin Lewis points to the fact that, at the start of the Coronavirus pandemic, some influencers were using a feel good Klarna hashtag, which he says was undamentally inappropriate for a credit product. If some influencers are encouraging you to improve your mood by spending money that you don’t have at the time of purchase through a BNPL, then this essentially encourages longer term debt for momentary psychological relief, which is very concerning.

Not only this, but BNPLs conduct both hard and soft credit checks, depending on firm, or the scheme their customers want to use, which can be misleading if you don’t understand how a credit check can impact your credit score. Alice Tapper points to the fact that Klarna has three products – two that require soft credit checks, that don’t show up on your credit file, and one that requires a hard credit check. She says that 77% of consumers do not understand the difference between hard and soft credit checks, according to research by OnePoll and TSB, so customers may go ahead and apply for a loan which they don’t realise could hurt their credit score.

Credit card purchases

Psychological manipulation

BNPLs make their money off the fact that you spend more with them. They offer interest free borrowing, so they have to make their money somehow. It goes without saying that, for so many retailers to pay to use BNPL schemes, BNPLs must be increasing your spending habits enough to make it worthwhile.

BNPLs work by getting around what we call the ‘pain of paying. This is a psychological concept, which is that every time you spend money on something you feel negative emotions, and sense of loss – a pain. This ‘pain of paying’ is what stops consumers going ahead with purchases they’re dithering over. Then, as soon as you’re about to click off the BooHoo website (with your basket still filled with £100 worth of clothes), you see the option to pay in £25 instalments with a BNPL. ‘£25 a month?’, you think, ‘that’s nothing’. So, the pain of paying becomes less, and you’re much more likely to hit that Approve Purchase button.

According to Business Leader, retailers partnering with BNPL Laybuy have seen customers spend on average 60% more. That’s 60% more money than usual leaving your account! So while it feels like you’re saving money, or spending less, you could actually be spending more and hurting yourself financially.

Worse, several users have been tricked into using BNPLs, because they were the default option when it came to paying for something online. The fact that you actively have to opt out of what is essentially a scheme that gets you into debt is a very manipulative tactic, especially as, if you’ve accidentally opted into a BNPL scheme, you won’t know to make the regular payments, and your credit score could take a hit without you knowing.

Late fees and debt collectors

Like any credit scheme, where you owe money, there are consequences for not paying it. BNPLs may not advertise across bright pink billboards that you could pay a quarter or more of the original purchase price in late fees if you miss payments, but this is the case for most BNPL schemes. Check the table above in our ‘Main types of Buy now, Pay later’ section, to see the specific fees that Klarna, Clearpay, Laybuy and Paypal Pay in 3 charge.

Most BNPL schemes will also pass unpaid debts on to a debt collection company, which is very likely to harm your credit score. Even the very smallest missed payments, £10 here or £20 there, that we don’t think of as particularly consequential and are easy to forget about, may end up being passed to debt collectors and affecting your credit score.

How can I use Buy now, Pay later safely?

Despite their risks, there are good things about BNPLs, such as their interest free nature. As long as you use interest free credit wisely, including not taking on more than you can repay and making sure that you make all repayments on time, BNPLs can be useful for helping you manage returns and cash flow.

Alice Tapper says, “It’s really important, if you are tempted to use these products, to really question why. If it’s that you are getting into debt that you cannot afford and you’re doing it because you cannot afford the whole payment at the time and your finances are unstable, really think twice”.

Here are five steps to use Buy now, Pay later sensibly:

Keep to a budget

One key rule to stick to is: if it’s not in your budget, don’t buy it. It doesn’t matter if a BNPL is offering you the chance to pay for a £10 purchase in 10p instalments (unlikely), don’t fall for it! If you have to use a BNPL, use it within spending limits that you set for yourself. You will feel much more in control this way, as there’s nothing worse than not knowing what money is coming in and out of your bank account, and whether you’ll have enough to pay for essentials this month, let alone save anything for your future. One of the best ways to budget is the Three Accounts Budgeting system, developed by debt charity Christians Against Poverty. You’ll have three bank accounts (you probably already have two, and it shouldn’t be too difficult to open another). Use one bank account for your essential direct debits – your rent or mortgage, and bills. The other is your weekly spending account (this should be a simple cash account without an overdraft facility, to avoid accidentally overspending) where you put in the exact amount of money you’ve budgeted to spend on food, entertainment etc. that week. The final account is your savings account, where you put any leftover money you want to save for a later date. This system means that you’ll always know exactly where your money is going, and not overspend on food or clothes, as once the money in your weekly spending account is gone, it’s gone. Give yourself a weekly allowance for each non-essential item you may want to buy (make sure you can afford them and that they fit comfortably in your budget), and place this money in the weekly spending account. If the instalments for a BNPL scheme exceed what you’ve budgeted for, don’t use it.

Check the product, and read the fine print

Make sure you check all the risks involved in using a BNPL before you agree to it. Don’t rely on BNPL providers to advertise this to you, even if they should. You’re choosing to take out credit, so make sure you protect your financial future by digging up all the information you need on the BNPL scheme’s website. This isn’t as fun or easy as whizzing through the Asos checkout with Klarna’s ‘Pay in 30 days’ scheme, but BNPLs are debt, and you need to protect yourself.

Make sure you know the difference between things like a soft credit check and a hard credit check, and a long term BNPL and a short term BNPL. Klarna, for example, offers a long term BNPL product that requires a hard credit check (this could affect your credit score), which is different from its other products, which only require a soft credit check (this won’t affect your credit score).

Online shopping with a credit card

Always pay on time, and set payment reminders

If you miss payments on BNPLs, this is likely to affect your credit score, so it’s important to always remember how much you’ve spent through a BNPL, and when to make the payments. Although missing a £5 payment on something every month pay not seem particularly consequential, you want to make sure your credit file is in good shape if you ever want to take out a mortgage or other important loan. Any negative marks on your credit file will remain there for six years, which is a long sentence to serve for missing a few pounds in payment. Set reminders on your phone to pay Klarna, Clearpay or whichever BNPL firm you’re using, and ask for confirmation that the payment has gone through, if you don’t receive it automatically. If you let a late payment go on too long, most BNPLs will send your debt to a debt collector, which almost always affects your credit score, too.

Don’t fall for retailers’ tricks

Online retailers have ways to push your deliberation over an item into a purchase. This is way more difficult to resist when you have the temptation for paying for an item in four or six interest-free instalments with a BNPL. Some retailers will put ‘limited time offer’ on their items, which can push you into an impulse buy if you think you only have 24 hours to get those vintage shoes you’re lusting over for half price. When you have the option for delay your payment until payday with a BNPL, the temptation feels irresistible. However, if you know you’re being manipulated, you can better protect yourself against emotional shopping, and make a more logical decision. Ignore the ‘while stocks last’ offers and tell yourself, if this item is really going to transform my life the way I think it will, it’s worth waiting for and saving for. If it really is going out of stock, it will come back into stock again when I can afford it. The best thing you can do is wait a concentrated amount of time – 48 hours, a week or even 30 days. If you’re still desperate to buy it, you can revisit the idea again. If not, you didn’t really want it in the first place, and you’ve just saved yourself a load of financial pain!

Don’t repay BNPL loans with a credit card

It’s not a good idea to pay debt with more debt! That is basically what you’re doing when you repay BNPL loans with a credit card you’ll have to pay off too. You’re just deferring the payment, and possibly increasing the temptation to spend more, as you don’t have to pay now. Plus, if you’re paying any interest on your credit card, you’ll lose all the benefits of the BNPL interest free payments. Some banks have charged transaction fees for customers using credit cards to pay off BNPLs.

Will Buy now, Pay later improve my credit score?

Using Buy now, Pay later is unlikely to improve your credit score, but will very likely hurt your credit score if you fail to make repayments on time, or get your debt passed on to a debt collector.

I can’t pay my BNPL. What do I do?

If you’re struggling financially and can’t make your BNPL payments, the first thing to know is, you’re not on your own and there are lots of things you can do to get help and support. Here are three steps you can take if you’re struggling to pay your BNPL.

Contact your BNPL provider

It’s in your BNPL’s best interest to help you manage how to pay your debts, as it costs them time and money to chase it up with a debt collection company. Don’t wait until you miss a payment, let your BNPL provider know straight away that you’re having difficulty. They may agree to not charge you late fees while you work out a way to pay, or give you a payment extension (just make sure these don’t come with any extra fees). Most BNPLs, such as Clearpay and Klarna, will stop you making payments to them, as soon as you miss a payment, which offers you some protection from further debt. Most BNPLs also have a hardship policy that allows them to try and help their customers get back on track.

Contact a debt charity for support

While it is important to let your BNPL know that you’re struggling to make payments, you should also always seek independent advice from a debt charity. Charities such as StepChange, National DebtLine and Christians Against Poverty offer professional, free advice and support on dealing with debt and your creditors (people you owe money to – in this case, your BNPL).

Debt management options

If you’re struggling with serious debt that you can’t get out of, don’t lose hope. There are lots of things you can do to get your debt under control, including debts you owe to a BNPL firm.

Debt Management Plan (DMP)

A debt management plan, which a debt charity can help organise for you, will allow you to make affordable repayments on your debt, while potentially freezing interest and other charges, such as late fines. Your DMP advisor will deal with creditors on your behalf, saving you a lot of stress.

Individual Voluntary Arrangement (IVA)

An Individual Voluntary Arrangement (IVA) is a government approved debt help scheme, which helps you if you’re struggling to repay your debts. An IVA allows you to pay back a small part of your total debt, and get the rest of it written off after just a few years. At the end of the IVA (which runs for 5-6 years), no matter how much money you have left to pay back, the debt gets cleared. You will make small, monthly payments towards your debt, based on what you can afford. IVA Advice offers free, qualified advice on whether you are eligible for an IVA, and how to arrange one.

Debt Relief Order (DRO)

If you owe less than £20,000 in total and have less than £50 in disposable income and assets, you could get a Debt Relief Order. This is a personal insolvency process which gives you legal protection from your creditors, and writes off your debt after one year.

Now that we’ve gone through Buy now, Pay Later schemes, how they work and their potential pitfalls, we hope you’ve got enough information to arm yourself against debt, and use BNPLs carefully and to your advantage if you use them at all.

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