What you need to know about buy now, pay later schemes

Since this blog post was written we’ve worked with our customers and designed a product that tackles the pain points seen across the industry. Monzo Flex is a better way to pay later - and you can read more about it here.

Buy now, pay later (BNPL) schemes are everywhere. And now it's so important to stay home, you might be shopping online more.

That could mean you come across buy now, pay later schemes, and it might be especially tempting to use one.

So we've outlined a few things you should know before using buy now, pay later schemes 🛍️

They're financial commitments that let you delay and spread payments over weeks or months. They're usually found at the checkout of online retailers.

There are lots of BNPL schemes available, including Klarna, Clearpay, Laybuy and Payl8r, and many stores also have their own, like store cards and catalogue credit. Major retailers, including ASOS, H&M, Marks & Spencer and Urban Outfitters, offer payment schemes with some of the major BNPL providers, making them an easy and convenient way to pay.

But with 27 million (more than half) of UK adults starting the new year in debt, are BNPL schemes the right option for you? Here's a few things you should know about them.

A fifth of all UK shoppers – that’s 10 million people – have bought something through a BNPL scheme over the last year, according to research by Comparethemarket.com published in January. Young people aged 25-34 used them most, with a third of those surveyed using a scheme over the past year.

BNPL are becoming more common, growing at a rate of 39% per year, according to a recent report by payment processors Worldpay. Seven million people have now used Klarna, for instance, twice as many as the year before.

Moreover, the schemes are the UK’s fastest-growing online payment method, the report added. BNPL is growing twice as quickly as bank transfers and more than three times as fast annually as digital wallets, which involve payments via a mobile phone.

Companies offering BNPL are often popular on social media, and market to shoppers through organic and targeted ads. In a recent survey by Payplan, 59% of 18-34 year olds said that online influencers had influenced their lifestyle choices, while 30% admitted to having overspent due to social media ads. Klarna, for instance, works with influencers and reality TV contestants on its social media channels.

Given the amount of time teenagers and young adults spend on social media compared to other age groups, it’s likely that they come across BNPL schemes more often.

"Buy now, pay later delivers a more intuitive level of convenience and access for consumers than traditional credit cards,” according to the report by payment processors Worldpay. “As digitally savvy Gen Z consumers come of age, this is especially significant as younger consumers are more used to making snap purchases and then deciding later if they want to keep it."

Once you’ve bought something using BNPL, you must pay the money back like you agreed. If you don't, you could face a fine or even end up in court (depending on the terms you’ve agreed to). Very often, these terms will include making a minimum monthly payment.

One 30-year-old woman, Louise (not her real name), who didn’t realise she was supposed to manually set up a Direct Debit, recently revealed what happened when she failed to meet her minimum monthly payments. She started getting letters demanding the money. “I wasn't earning very much at the time and the idea of dropping £50 a month to cover the repayments was unmanageable,” she told Refinery29. “The repayments kept increasing each month because I was getting fined for missing payments, and the interest was insane... At one point, my balance was over £500."

The situation escalated until debt collection agencies got in touch to say it would be taking her to court on a specific date if she didn’t repay the money. The shock finally spurred her to call them and arrange to repay.

Before you use BNPL, make sure you read the terms and understand what you’re signing up for!

“Failure to pay outstanding bills can damage your credit score and result in a spiral of outstanding payments which could jeopardise important life milestones like buying a house,” says John Crossley, Comparethemarket.com’s head of money.

“It is concerning that many of these schemes appear to be targeted at younger demographics.” Missing payments or failing to repay what you owe (known as defaulting) can be added to your credit report and stay there for six years, meaning you may struggle to get approved for credit in future, such as a loan or mortgage. Something to think about if you hope to one day own a home.

A fifth of those surveyed by Comparethemarket.com said they'd damaged their credit score through BNPL. The proportion was higher among 25-34-year-olds, with four in 10 claiming to have damaged their score.

As many as 41% of shoppers don’t know that BNPL schemes can negatively impact their credit score, Comparethemarket.com found.

Louise, who almost ended up in court, was one of them. “I had defaults on my credit record, which meant I couldn't get credit elsewhere,” she told Refinery29. “Getting in years' worth of debt for a £45 Topshop dress really wasn't worth it."

If you use them correctly and follow the terms – by not missing payments and repaying the money in full – BNPL schemes could strengthen your credit score.

“It’s always important for people to carefully check what they’re signing up for. For example, if you take out credit and then miss the repayment deadlines, you could end up with negative information on your credit report that will adversely impact your credit score,” an Experian spokesperson, told Which?. “However, if retail credit is used sensibly and repaid on time, it can actually help people strengthen their credit history and improve their score.”

BNPL can encourage you to spend more and potentially land you in debt. Four in 10 say the schemes encourage them to spend more than they otherwise would, Comparethemarket.com found. While a survey by the debt advice providers PayPlan found that 73% of its 18-35-year-old clients attributed a BNPL scheme to a subsequent debt problem.

“Although these schemes are convenient in the short-term, they can have a negative lasting effect,” says Rachel Duffey, PayPlan’s CEO. “If used frequently, it can be easy for buyers to lose track of repayment deadlines, resulting in late charges and fines.”

23-year-old Julia Foley, who saved £3k in just six months and shared her tips in a now-viral Twitter thread earlier this year, said she avoids BNPL at all costs and advises others to follow suit. “DO NOT USE buy now pay later schemes (Klarna, very etc) for things that you do not need” she wrote.

Thanks to the Financial Conduct Authority (FCA), as of November 2019, BNPL services, including store cards and catalogue payment plans, must tell consumers when a 0% interest offer expires. And they’re no longer allowed to backdate interest charges on money that was repaid during such an offer period. The FCA says its regulations will save consumers around £40-60 million a year.

Given their popularity, it’s clear we all have the potential to be attracted by BNPL schemes. And there are cases where using them can be useful, without negatively impacting your money. But it pays to sit back and pause before signing up to one.

"The psychology of the impulse purchase is very strong, but I bet most of us have things in our wardrobe we bought on the spur of the moment, but never wear," Sarah Pennells, editor of consumer finance website Savvy Woman, pointed out.

Dan Lane, from Christians Against Poverty, makes another salient point: “If you can't afford the product today - why do you think you could afford it in 30, 60 or 90 days time?"

If you’ve read the terms and conditions and want to proceed, Which? advises shoppers to: