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BNPL – Better Not Pay Later?

Get back those bank chargesIs BNPL good for your finances? OR Should you ever “pay later”?

Buy Now Pay Later (BNPL) is a type of credit which has become increasingly popular over the last few years.  Brands include, for example, Klarna, Clearpay, Laybuy and Openpay.

These companies make their money by contracting with retailers, who pay them a percentage of the sale.

BNPL can seem very appealing if you are strapped for cash. If you purchase a high ticket item that you really need, you can defer payment without paying interest. However, if you miss a payment, you can end up paying a big penalty. Sometimes, it can be interest from the start of the monthly payments and other times from the month of the missed payment. You may also incur late payment fees.

Some schemes offer repayment terms of 30 days and others up to 12 months.

Is BNPL widely used?

The This is Money article Buy now, pay later purchases surged last year with more relying on it as the cost of living rocketed – and one in five now use it once a month described how, against the backdrop of increased energy and food prices, more and more people are feeling the pinch:

“19 per cent have increased debt either by taking out new credit, increasing existing credit or going into their overdraft.

Against this background, BNPL services continue to grow in popularity, with many consumers using Klarna, Clearpay and others to spread payments or pay later.

Of those who use BNPL, one in four say they rarely have the money in their account to pay in full for the things they are buying.

Research also suggests that some people using BNPL are doing so when they are struggling financially.”

Pros and Cons of BNPL

BNPL can help you spread payments, helping with your cash flow. It also allows you to order a number of items before choosing what to buy before sending items back. It is possible to use BNPL and not pay anything over the cost of the item but you need to be careful.

There appear to be few money experts in favour of BNPL.

Hannah Duncan from HD Investment Content discusses in her article It’s not fair to target young people with Buy Now Pay Later how BNPL can prey on young people’s insecurities. She interviews a psychologist and has conversations with debt charities about some of the negative impacts on vulnerable people. The conclusion from is that there needs to be more “friction”:

“We need more friction, more protection and less emotive marketing… Our young adults need support, not more debt. something the FCA is debating at the moment. In non-technical terms this means that getting credit of this kind should not been a “smooth” process, there should be more “friction”. In short, it should be more difficult to get any kind of credit.”

She goes on to say:

“Promoting effortless debt for unnecessary items like fast fashion isn’t just unfair for young people, it can impact our whole society. Most importantly, young people deserve more support – not extra debt options – as they navigate through pandemics, stagnant wages, recessions and astronomical university fees”.

Financielle helps women to take control of their money and be financially well. Financielle founders Laura and Holly have very strong opinion on BNPL, as you can read in their article Buy Now, Pain Later. They discuss the targeting of women and the dangers involved in using BNPL, providing readers with the stark but sound advice to “ditch BNPL and instant gratification…”

Naomi Willis from money saving website SkintDad says “Buy Now Pay Later may seem like a good idea, but it can quickly spiral into an expensive debt trap. It’s also worth considering the environmental impact. Using BNPL can mean you get to try multiple sizes and styles [of clothes/footwear] without having to pay up front, but once you’ve returned the goods of the brand new items end up in landfill, rather than being resold.”

Sara Williams is a volunteer advisor at Citizen’s Advice and runs the debt advice website Debt Camel. She says “BNPL can seem very convenient, but that is the main problem – by removing some of the “friction” from an online purchase, BNPL makes it too easy for many people to buy more than they want or can afford. Proper regulation and credit reporting is needed so that as much as possible of the advantages are kept, but the problems are reduced.”

The lack of regulation of BNPL

BNPL is currently unregulated. So, unlike other financial credit agreements providers do not have to carry out similar checks to other lenders. Conventional credit checks would ensure you can afford the payments and the lender would have to tell you in detail about the product and what will happen if you don’t pay.

At the moment also you cannot use the Financial Ombudsman if you have an issue and you don’t have Section 75 protection.

The Government is consulting on the Regulation of Buy-Now Pay-Later, closing  at the end of 6 January 2022.

Can you afford BNPL?

Using BNPL may be a good way to spread payments. But you must work out if you really can afford it before purchasing that item. It might well be that you have a month with big car bills, for example, and that after then cash flow will be easier.

However, if you are thinking of spreading out a payment plan over a number of months, list your other expenditure for each of those months to see if you can really afford it. Also, take into account the possibility of increased energy bills, for example.

Using BNPL may affect your credit score. All you need to know about credit score rating. Check your credit score before applying, as you may be refused.

Look at other ways to save in all areas of your life. If you are already in debt you can get advice from Step Change, Citizen’s Advice, Debt Advice Foundation, Money Helper and Debt Camel.

2 piggy banks,coins in two jars credit card and machine to pay