What do we know about Buy Now Pay Later?

There are a number of Buy Now Pay Later (BNPL) offerings. There's been some scrutiny of these recently, and you should be aware that they can be taken into account when assessing mortgage applications. We explain what they are, how they work and some things to consider if you use them.

Cast your mind back to what, admittedly, feels pre-historic now. Do you remember shopping channels on TV? Where an overly enthusiastic host would gush over a multi-purpose blender. They would insist that this was a revolutionary product that all their friends absolutely loved, and the co-host would eagerly agree. How much was this device? It could be yours for six small interest-free payments of £10.99, and you’d pay nothing the first two months. What a steal!

What is Buy Now Pay Later?

Although teleshopping isn't as popular as it once was, it is still around, and the payment method introduced on these shows has leapt across to the internet. We are in the Buy Now Pay Later era, which is precisely what it sounds like. Buy Now Pay Later allows you to purchase an item and pay within a specified timeframe set by the lender – just like those old shopping channels. With shiny new branding, these schemes are a popular way to pay for goods. More than 17 million UK customers have used Buy Now Pay Later schemes.

BNPL companies can provide an alternative to the millennials aged 18 to 29, who haven’t signed up for any credit cards (49% of them). So why don’t these young adults aspire to own credit cards? In part, many younger millennials and Gen Z feel they are in delayed adulthood. The markers of what it means to be an adult have changed; fewer people are making big life-defining purchases, and more boomerang millennials are moving back home. Additionally, younger millennials grew up during the economic downturn where the adults around them were defaulting on loans and the media cycle hammered home the dangers of credit.

How do lenders make money?

With interest-free lending terms, you’re probably wondering if there is a catch. How do lenders make their money? Buy Now Pay Later providers make money by taking a cut from what they help the retailer sell. So, for example, if you buy a dress for £100, the lender will pay the business £96 and make a profit of £4 on what you pay back. While it may sound steep for the company, credit schemes get more people buying.

Is Buy Now Pay Later a good idea?

Being able to pay later or split the cost of your purchase over time sounds reasonably harmless, but it can cause issues if not used responsibly. You can’t search up a Buy Now Pay Later scheme without an auto-suggestion about the potential impact on your credit score. There have been stories about people being denied mortgages for using a BNPL service because it's taken into account in the affordability assessment.

Here are the facts: Buy Now Pay Later is, of course, a form of credit that can impact your score, but how it affects your credit score depends on how you use it. If you use the financing scheme responsibly by repaying on time, and only when you need it, both factors may help your score.

However, missing payments and using too many schemes can become a problem. First, most lenders charge a late fee, and if this is continuously missed, costs can rack up. One company charges a late fee of £6 for orders under £24; for orders over that amount, it is capped at 25% of the order's cost. Another company charges £12 as a standard late fee that is limited to twice per transaction. If you miss payments, most Buy Now Pay Later providers can report missed payments to the credit reference agencies, impacting your score. Some lenders may run hard credit checks on your account, which can indicate to banks that you cannot afford to pay back loans if done too often.

Should you avoid it altogether?

After the most recent recession, some people have lingering fear about credit and debt, but these concerns can be normal and sometimes a necessary part of healthy financial decisions. Buy Now Pay Later could be a timely solution that is fairly low risk. If Buy Now Pay Later is something you choose to use, make sure you're fully aware of your requirements as a borrower and have a plan to pay off the loans within the set terms.