What are Buy Now Pay Later deals?
If you’ve been on any big retail website recently, you’ve probably been given the option to pay using a Buy Now Pay Later deal. You can even order a takeaway from Deliveroo using a BNPL scheme now.
The big players in the game are companies like Klarna and Clearpay, but other companies and banks are starting to offer similar services. They basically give you the option to pay (up to 30 days) later or to split your payment into instalments, giving you the chance to buy something even if you don’t actually have the money for it in your bank account. They’re particularly popular because unlike credit cards or bank loans, they are interest free, meaning you can borrow the money and pay back later without having to pay anything extra (provided you pay the money back on time).
What are the risks of Buy Now Pay Later deals?
So far, BNPL deals sound pretty good eh? So what are the pitfalls?
They can encourage us to spend more than we can afford
These companies know the temptation to buy something – whether it’s a pair of jeans or a takeaway – is often strong enough to override the fact we can’t actually afford it. With BNPL deals, it’s easy to get caught up in a spending spree without considering the consequences.
They can land you in debt
Problems with BNPL deals really start to heat up when you can’t pay back the money on time. This is the sticky situation thousands of people find themselves in, and the consequences aren’t pretty. Some companies will charge late fees which quickly start racking up, and other companies will pass your details onto debt collectors. Debt collectors will persistently write you letters, ring your phone and turn up at your door if you haven’t paid the money back and they’re struggling to get hold of you.
Buy Now Pay Later deals can affect your credit score
According to the good people at Experian, BNPL deals are now routinely reported to credit reporting agencies like themselves, including shorter-term transactions from the likes of Klarna. Unlike the longer-term BNPL loans, short-term BNPL transactions are not currently factored into credit scores, but this is likely to change quite soon. This means, if you have used a BNPL deal and haven’t paid the money back on time, it is likely to hit your credit report and could affect your credit score, either now or in the future.
What is my credit score and why is it important?
Your credit score is a score based on your financial history, showing how reliable you are when it comes to borrowing and paying back money. It tracks all the times you’ve borrowed money in the past, how much you borrowed, and whether you paid it back on time – this means any kind of money borrowing including credit cards, mortgages and as of recently, BNPL deals too.
Your credit score is important because it affects whether lenders will lend you money in the future. If, for example, you’re looking for a loan to buy a car or are hoping to get a mortgage on your first house, the bank will firstly check your credit score. If you have a bad credit score, they are unlikely to lend you the money. If you want to check your credit score you can do this for free using the Experian tool.
Should I use Buy Now Pay Later deals?
Not everyone has a nightmare experience with BNPL deals. If you are someone who is very organised with your money and you know you can pay the money back on time, they could be helpful in those times when you’re waiting on pay day.
But you’re asking us, we’d say avoid using them if you can. The risks tend to outweigh the benefits and as many people have proven, they can land you in a tricky financial situation.
For more support with money
- StepChange offers free advice on your debt problems, basing it round what’s right for you.
- The Money Helper offers free, unbiased and independent advice about all financial matters.
The Mix would like to thank Experian for their support with this article.
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