Buy now pay later (BNPL) schemes are exactly as they sound: customers have the opportunity to purchase a product and pay the full amount due to the seller at a later date. There are various BNPL companies and schemes available, with some of the most popular, such as Klarna, available to use on sites run by high street stores.
Each BNPL application will have different terms and conditions, with one of the most common being that the cost of a purchase will be split over three months, and therefore paid in three separate installments.
What does buy now pay later cost?
Buy now pay later schemes are usually free to use providing that the buyer does not miss any repayments. This means that the buyer will need to repay the full amount of the purchase within the timeframe set by the application.
Typically, BNPL payments are charged automatically on a monthly basis, with the cost split over a matter of months or weeks. It is important to check that there is enough money in the bank account that the application will charge to avoid missing payments.
Some applications allow the buyer to spread the cost over a considerably longer timeframe but interest can then be charged at a much higher rate.
What happens if a payment is missed?
If a payment is missed, the application will usually charge a fee or add additional interest onto the upcoming payments, much like is the case for payday loans and other unsecured loan options. With some applications it is also possible to pay off the balance before the application collects the payment, meaning there is no need to worry about whether the payment will go through automatically or possibly bounce back.
This means that it can become expensive to use if payments are missed repeatedly, and then the user will end up paying much more than the product was initially worth.
In order to avoid missing payments, it is advisable to set reminders or pay off the sum as soon as possible.
Can using buy now pay later affect credit scores?
Using buy now pay later can both positively and negatively affect a user’s credit score.
If all repayments are paid on time, this can improve a credit score as it demonstrates the user is reliable when it comes to money. If repayments are missed, the opposite will happen, and a user’s credit score may be worsened, impacting your ability to borrow money in the future. In extreme cases, if someone’s credit score is very poor, it may be necessary to sell your home online in order to consolidate and repay your debts, as other credit providers will not lend to you.
This can in turn negatively impact any future loan or mortgage applications. In addition to this, missing repayments may mean that a user will be unable to use buy now pay later in the future.
What are the alternatives to buy now pay later?
There are a couple of alternatives available to using buy now pay later schemes, with the most popular being the use of a credit card. As buy now pay later is essentially a form of credit, the two premises are very similar.
Credit card repayments should be made at the end of the month and allow a user to borrow money on the premise that it will be repaid once they receive their monthly income. The same principles apply in that if a user misses the repayment, which may be automatic, interest and additional fees may be charged.
Alternatively, an individual looking to make a larger purchase may apply for a loan instead of using buy now pay later or a credit card. This is not advised unless the purchase is essential or the applicant is certain that they will be able to make the agreed repayments to avoid falling into debt.