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Buy now pay later – what you need to know

Buy now pay later (BNPL) is growing fast in popularity.

It’s a way of buying things on credit and paying for them later, allowing you to spread the cost of a purchase interest-free.

The government says the number of transactions tripled in 2020 as online shopping increased because of coronavirus.1 

But before you decide to choose a BNPL option, you should understand exactly how it works and whether it might affect your credit score.

How does BNPL work?

A buy now pay later 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 buy now pay later 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 1 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

Research published by Citizens Advice in April 2021 suggests that 14 million people in the UK had used BNPL in the previous 12 months, including nearly half of those aged 18 to 34.2

If it’s managed correctly and you never miss a payment, it 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 rating 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 many don’t properly understand what they’re agreeing to. It’s no surprise then that more than 40% have struggled with making a repayment.

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 to 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?

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

However, the government announced in February 2021 that BNPL would be regulated by the Financial Conduct Authority (FCA) once new legislation was passed.

Don’t borrow more than you can afford

According to Citizens Advice, 40% of those who’ve used BNPL don’t think of it as ‘proper’ borrowing.

This means those signing up for BNPL don’t always take as much care 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.