Buy now, Pay Later schemes - benefits and risks
Have you ever spotted the ‘Buy Now, Pay Later’ option when checking out any of your online shopping baskets? In this article we discuss the benefits and risks to consumers.
If, like us, you have done most of your shopping online over the past year, you have probably noticed the rise of “Buy Now, Pay Later” (“BNPL”) options, such as Klarna and Clearpay, as payment options at checkout. In this article we explore what BNPL is, what its benefits are and, crucially, what risks it may pose.
What are the benefits?
BNPL companies like Klarna and Clearpay operate in the retail finance sector - in other words, they lend to consumers in order to fund retail purchases, such as clothes or furniture. Here are some benefits of the BNPL option:
1. Manage cashflow
BNPL allows us to spread the cost of a purchase by paying regular instalments over a number of months. The main benefit of spreading out payments over a longer period is that our bank account doesn’t take a huge hit one month if we make a significant purchase. This means that BNPL can help us to better manage our cashflow by spreading out significant costs over a longer period.
2. Interest-free
Most BNPL schemes are interest free. Before BNPL, if consumers wanted to defer paying for something they would have had to use a credit card, which opens them up to the risk of very high interest rates. However, with BNPL, shoppers do not run the same risk of paying extra for the benefit of deferring payments.
What are the risks?
The BNPL industry is focused on making it easier for consumers to part with their cash in order to increase online sales by offering interest-free payment instalment plans without requiring a credit check. Here are some risks that come with BNPL:
1. Overspending
The obvious risk to consumers of BNPL schemes is overspending: BNPL providers make it really easy to spend online. Unfortunately, this can also make it easy for people to lose track of how much they have spent, how much they owe to various BNPL providers, when repayments are due, and whether they can afford to make future repayments.
2. Missed repayments
In fact, missed repayments are one way that BNPL providers generate their revenue: if a shopper misses a payment (e.g. because there are not enough funds in their account), they can be charged a late fee by their BNPL provider. Although repayments are taken automatically from an account, it can be quite easy to miss a payment: for example, paying for a holiday may cause you to miss a repayment if the repayment is due before your next payday.
3. Impact on your credit score
In addition to late fees, consumers should be aware that BNPL providers can refer them to credit reference agencies if they miss or are late in making a repayment, which will impact their credit score. The UK’s advertising watchdog recently warned BNPL providers not to claim that their products never negatively impact users’ credit scores unless they can prove that this is actually the case.
4. Regulation
Lastly, the BNPL space is not currently directly regulated in the UK. Unlike credit card providers that need to comply with specific rules designed to protect consumers, there aren’t yet any specific rules for BNPL. This means that brands and social media influencers can - and do - promote BNPL products online without having to provide any warnings or detailed information to consumers before they sign up.
Should we use BNPL schemes?
Ultimately, BNPL is still a form of credit. Like a credit card, BNPL has a set of unique risks and benefits that consumers should be aware of.
BNPL schemes can be a great way to better manage our cashflow, particularly if we need to make a large purchase one month (such as an item of furniture) and don’t want to be watching every penny until the end of the month.
However, it is up to us as consumers to research the details of what we are signing up to (including the consequences of missing or late payments), closely monitor our outgoings, and ensure we only spend what we can afford.