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Buy now pay later – what you need to know

Buy now pay later (BNPL) lets you spread the cost of a purchase interest-free. It’s growing fast in popularity, but what should you look out for?

Our research shows BNPL is now the second most used form of finance (32%), behind credit cards (69%). This is ahead of overdrafts (27%), retail finance (15%) and personal loans (13%). 

The study surveyed 1,000 HSBC current account customers in the UK, aged 18 to 74.  

BNPL was most popular among those aged 25 to 34, with nearly half saying they’ve used it in the past year (49%), followed by those aged 18 to 24 (45%) and 35 to 44 (45%). 

The research suggests women are also more than twice as likely as men (43% vs 21%) to use BNPL.

The majority of both those who have and haven’t used a BNPL product, however, expressed concern about it making it too easy to overspend or get into debt.

Before you decide to choose a BNPL option, you should understand exactly how it works and what to look out for.

How does BNPL work?

A BNPL agreement means you can shop for things and delay paying for them.

There are generally 3 ways of paying:

Pay later: there’s usually an interest-free period of between 14 and 30 days. But if you don’t pay on time, it can get very expensive as you might be charged late payment fees.

Pay in instalments: the amount you owe can be repaid over several months in smaller chunks sometimes called ‘slices’. Again, if you miss payments you could be hit with late payment fees. 

Pay on finance: this works the same way as a loan and a hard credit check will be done.

BNPL can appear to be a cheap way to borrow, but it might also encourage you to spend money when you might not otherwise have done.

So, before signing up, ask yourself these 4 questions: 

  1. Would I have bought this item in the first place if BNPL wasn't an option?
  2. Do I have and will I have enough money to make the future payments?
  3. Is there a better or more cost-effective way to borrow?
  4. How many BNPL agreements do I already have?

When considering BNPL, check budgeting apps to work out if you can afford the payments or use our online budget planner. If you have the HSBC UK Mobile Banking app, you can use our Balance After Bills feature, which helps you budget successfully from one payday to the next.

Read the BNPL terms and conditions carefully to make sure you clearly understand any late payment fees you could be liable for. 

It’s also a good idea to research different ways of borrowing money, such as 0% credit cards or overdrafts

Pros and cons of BNPL

According to our study, BNPL was mostly used to buy clothes, followed by food and drink, shoes, appliances and electronics, and games and toys, in the past 6 months. Reasons for using BNPL included the ability to spread payments (20%) and how quick and easy it is to use (15%).

If it’s managed well and you never miss a payment, BNPL can be a free way to borrow money. But keep in mind, any remaining instalments are automatically taken from your account at set dates – and missed payments can lead to:

  • late payment fees
  • going over your overdraft limit
  • damage to your credit score if you’re late or miss payments

Citizens Advice says more than a quarter of those who’ve used BNPL have regretted it.

Many people use it without realising and don’t properly understand what they’re agreeing to. It’s no surprise then that more than 40% have struggled with making a repayment.1

The risks of paying in this way are not always highlighted clearly when you sign up.

You might not always remember a BNPL purchase made 2 or 3 months ago. You should get reminders, but it’s also a good idea to note down when your instalments are due. That will help you remember and make sure you have enough funds to pay on time. Otherwise, you risk being charged a late fee if the instalment can't be taken.

What protection is there?

BNPL agreements are currently unregulated – although that will change soon.

For example, BNPL lenders don’t have to carry out such stringent affordability checks compared to credit card or loan providers. This means it’s up to you to limit what you borrow and make sure you can afford to pay it off.

At the moment, using BNPL means you’re not protected by Section 75 of the Consumer Credit Act. When you use a credit card, you do get this protection for purchases over £100 if goods are faulty or not delivered.

You can’t complain to the Financial Ombudsman either about a buy now pay later product.

The UK government announced plans to strengthen rules on BNPL services in June 2022. For example, lenders will need to make sure loans are affordable and adverts are fair, clear and not misleading. They’ll also need to get approval from the Financial Conduct Authority (FCA).2

Don’t borrow more than you can afford

According to Citizens Advice, 40% of BNPL customers have had to borrow money to pay off BNPL debt and 1 in 10 customers didn’t fully understand how the repayments would be set up.3

People don’t always take as much care signing up for BNPL as they would if they were applying for a credit card or loan.

Most purchases are for relatively low-cost items. But if you’re not careful, you might end up with multiple payments you can’t afford, unless you’ve budgeted properly.

If you do sign up for a BNPL agreement, you should treat it like any other debt, and never borrow more than you can afford.

All figures, unless otherwise stated, are from HSBC UK. Total sample size was 1,000 adults, aged 18 to 74, who hold a current account with HSBC. The survey was carried out online between 3 to 16 March 2022. The figures have been weighted and are representative of all current account customers in the UK (aged 18+).