If you’ve been browsing online recently you may have noticed the option to ‘Buy now pay later’ (BNPL) through companies such as Klarna and Clearpay.
Buy now pay later gives you the opportunity to purchase an item straight away but spread the payment over several months. And it’s growing in popularity with 15 million people, which equates to around 28% of the UK’s adult population having used BNPL at least once.
How does BNPL work?
When you buy something using BNPL you’ll usually have between 30 days and 12 months to pay. You can spread the cost out over a few weeks or months, usually scheduling regular repayments every week or fortnight. The BNPL companies earn money by charging a fee to the retailer but for the customer, purchases are interest-free, so you only pay for the item itself.
Is BNPL a good idea?
BNPL can be helpful for making larger purchases when you don’t have the cash to hand and you need to manage your cashflow without incurring interest charges. However, there are also some potential downsides. If you don’t manage your re-payments carefully you can end up incurring late payment fees or interest on your purchases. So, you might want to consider creating a repayment reminder on your phone or making an early repayment if your BNPL provider has this option available.
Another question to ask yourself when considering BNPL is do I really need this product? If you are prone to making impulse purchases, BNPL could encourage you to overspend and over-extend yourself when it comes to making repayments within the required timescale.
Credit reference agencies have now started to include BNPL schemes in their credit reports. So, if you do miss or are late with re-payments this could be marked on your credit file and damage your credit score, making it harder to obtain credit in the future.
It’s therefore important to weigh up the pros and cons of a BNPL scheme and decide whether it’s the best from of credit for you. If BNPL isn’t ideal for you, a personal loan or credit card might be a better solution.