Buy Now Pay Later schemes are the new, convenient form of credit. You can split the cost of your purchase over monthly instalments or defer the entire bill. But what impact does this have on the Brits’ spending habits? Here’s an analysis of the merits and demerits of BNPL. ⭐Personal Finance ⭐Money Management

Remember that fancy vacuum cleaner you set your eyes on at the store? The one with the hefty price tag? The ‘Buy Now Pay Later’ (BNPL) scheme is a handy way of purchasing such expensive items. But this instantly gratifying method, too, has a dark side to it. The interest rates for such payment schemes can shoot through the roof. 

Before indulging in such a payment plan, consider the demerits, associated charges, and alternatives to make an informed decision. 

What is the ‘Buy Now Pay Later’ scheme all about?

There’s nothing more delightful than getting what you want when you want it – regardless of your bank balance. ‘Buy Now Pay Later’ schemes allow you to finance your way into instant gratification. By enrolling on this scheme, you can either spread your purchase’s cost into a series of interest-free payments or defer the entire bill. 

Buying something immediately without having to worry about the bill burning a hole in your pocket is the millennial way of shopping. But behind this façade of generosity, are additional charges and exorbitant interest rates. If used irresponsibly, these payment methods can gravely impact your credit score and cause financial imbalance. 

The origin of ‘Buy Now Pay Later’

You can’t un-see a price tag once you’ve seen it. But you can knock it back in your head. Most millennials and Gen Z shoppers don’t see ‘interest-free’ BNPL as a form of credit. But think about it – if you can’t afford it now, how will you pay it back later?

Retailers deploy innovative techniques for offering credit to customers to push their sales. So, in hindsight, the advent of ‘Buy Now Pay Later’ schemes was somewhat inevitable. Besides, a whopping 9.5 Mn Brits avoid shopping from retailers that don’t offer the BNPL facility. 

BNPL allows customers to defer payments for as long as 12 months. As long as you repay the entire bill within the interest-free window, you won’t incur any additional credit costs. Once the window expires, you’ll have to pay an interest on your purchase, which is usually high. 

The sustainability of financial systems relies on a customer’s capacity to buy now and pay later. For instance, an average person relies on a mortgage to purchase their first home or an auto loan to finance their car. It isn’t practical for someone to pay such a colossal amount upfront. But a mortgage and auto loan are both forms of secured, managed debt. BNPL, on the other hand, might encourage unmanaged debt. 

What’s alarming is the steep rise in unmanaged debt owing to BNPL schemes. Buyers aged between 18 and 24, owe an average of £225 in ‘Buy Now Pay Later’ schemes. Over 35% of Brits expressed their concern over their finances as BNPL pushed them into a pool of unsustainable debt. 

The utilization of ‘Buy Now Pay Later’ schemes quadrupled last year, with over 4.5 Mn users relying on them. This rapid growth and the underlying risk associated with these services call for a regulation to protect customers from falling into a high-cost debt problem. 

Does ‘Buy Now Pay Later’ comply with the FCA?

The FCA recently announced that it would start regulating the BNPL industry. The Buy Now Pay Later providers will now have to operate as per the FCA rulebook to protect consumers’ interest. Now consumers will be able to litigate matters with the Financial Ombudsman Service if the need arises. 

Up to this point, BNPL providers weren’t carrying out in-depth affordability checks on consumers. Once the industry comes under FCA’s regulation, they will have to meet additional requirements to ensure that the facility is only provided to consumers who can afford to use it. This step can aid in minimizing over-indebtedness in people, owing to BNPL. The guidelines will also urge BNPL providers to treat customers fairly, especially those struggling to keep up with repayments. 

While there’s no certainty as to when these rules will come into play, people anticipate further action in April 2021. 

Dangers of ‘Buy Now Pay Later’

As long as you repay the credit on time, BNPL purchases won’t necessarily be recorded on your credit report. However, if you fail to keep up with the repayments or delay them, they could potentially harm your credit score. This could hamper your chances of securing credit in the future. 

BNPL schemes make credit more accessible to people who are struggling with a pre-existing debt problem. Using BNPL for impulse buying and taking on the additional debt could worsen your financial situation and disrupt your peace of mind.

The idea of deferring a £200 bill is tempting but if it’s your affordability that’s holding you back from paying upfront, ask yourself if you will be able to repay it 12 months later.

While BNPL will soon come under the FCA’s regulation, the consumer’s responsibility is to read the fine print before agreeing to the terms. It would help if you considered the possibility of a change in your final capabilities. 

BNPL providers should endorse fair and rational standards of credit underwriting. BNPL providers should convey the terms, conditions and interest implications in clear and concise terms instead of convoluted messages. 

Associated charges 

When you finance you purchase through a Buy Now Pay Later scheme, you need to be punctual with your repayments. There are charges associated with BNPL which may come into action if you fail to keep up with the repayments. If you haven’t fully settled the balance by the pay later date, you’ll have to make a minimum monthly repayment, including additional charges and interest. 

Interest usually starts from the date of purchase, backdating to include the interest-free window. Repayment failure will incur you a heavy fine. 

The BNPL APR changes drastically after the interest-free window expired, but usually ranges between 20-40%. Although, some retailers levy a monthly fee instead of charging interest with a fixed APR. This fee can either be a percentage of the outstanding payment balance or a set amount. 

Some BNPL retailers can charge a settlement fee if you clear the balance after the pay later date passes. Usually, this charge is veiled under interest or a substitute for fees, but in some cases, it may incur you extra charges. 

When to use ‘Buy Now Pay Later’?

Deferring payments doesn’t have to encourage impulse spending. Neither should it encourage people struggling with a debt problem to take on more debt. There’s a time for everything, even for being able to delay payments. 

If your boiler gives out on a bone-chilling winter day, rather than waiting for days or weeks to find a suitable financing option, you may buy a replacement using BNPL. This way, you can cater to an emergency without having to stress about paying a hefty cost upfront.  

The pandemic has changed the way we live and work. While online shopping was a big trend before the COVID-19, it has gained much more popularity after the lockdown restrictions. The percentage of retail expenditure in online shopping only grows, so a good way for companies to make big-ticket items more affordable would be by introducing BNPL during checkout. But BNPL only makes sense when a consumer is confident of their affordability. They may use BNPL to make payments flexible and more feasible in a convenient way for them. 

Consider these alternatives instead

Financial circumstances can change, but a little introspection can save you from falling into unmanaged debt. It’s important for you to ascertain at least some short-term financial stability before buying a big-ticket item through BNPL. Even if you lose your source of income, do you have enough savings to pay off the BNPL balance? Or, do you have another contingency plan in place?

If a cloud of doubt surrounds you, here are some alternatives that you may consider instead:

• Buy second-hand items: You’ll be amazed by how often barely-used high-quality items show up on eBay and Gumtree. If it’s in good shape, go for a second-hand item rather than spending hundreds of pounds buying a new one.
• Cut costs and save: If it’s something that can wait, you may be better of saving up for this item. Cut some corners and align your budget to fit the new needs.
• Credit card: A credit with an introductory period of 0% interest could help you purchase essential items. Once you the interest-free window expires, you’ll have to repay the balance with interest. Credit cards, too, may be expensive if you fail to make the minimum repayments. 
• Personal loan: An unsecured personal loan can help you spread your purchase’s cost into easy monthly instalments, at decent interest rates depending on your credit rating. However, personal loan repayments should be taken seriously as repayment failure can damage your credit score.

• Authorized overdraft: An interest-free authorized bank overdraft is a pre-arranged debt from your bank. Herein, your bank allows you to withdraw money from your account even after you hit zero balance. However, overdrafts should only be used as a short-term credit to cater to urgencies. 
• Credit union loans: Credit union members pool in a part of their savings and form a not-for-profit financial organization. They offer loans to members in need at low-interest rates – 3%. However, to qualify for a credit union loan, you must be a member, and some may even require you to have savings built up with them. Credit unions factor in an individual’s affordability before lending money, to ensure that they will keep up with the repayments. 
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Assessing your credit score beforehand will help you review your credit arrangement options with more clarity. The good thing about these options is their eligibility criteria, which ensures that credit is lent only to those who can afford it. 

Why shouldn’t I use Buy Now Pay Later instead?

In these times, an average teenager’s first encounter with credit is BNPL. Moreover, for someone who is already struggling with debt or has overspending issues, BNPL may add fuel to the fire. It is undoubtedly a convenient way to shop, but at what cost? 

Here’s what you should know about ‘Buy Now Pay Later’ schemes:

• Soft credit checks: You can create a BNPL account in less than 2 minutes. There are no regulations, only soft credit checks, minimal affordability assessment or debt discussions involved. This freedom isn’t always used responsibly, which is when things tend to go south. 

• Ease of access to money: Whether you are shopping online or out in the open, BNPL gives you quick access to funds. Unlike other credit alternatives, you won’t have to go through much scrutiny or wait for days to get the proceeds. People with a tendency to overspend can indulge in a spending extravaganza, which they might regret later. 

• No credit limit: Several BNPL providers don’t have a cap on the credit limit. This implies that there’s no limit to how much you can purchase using BNPL. If you don’t completely understand the ramifications of missing payments, you could go on spending endlessly, relying on deferred payments. 

The downsides of BNPL are carefully veiled under its perks. A free complaints portal, Resolver, reported receiving 4,962 complaints pertaining to BNPL credit from April to September 2020. Failing to pay outstanding BNPL balances could damage your credit score and affect some of your key milestones, such as buying a house or your first car. As with any form of credit, carefully weigh the pros and cons to make an informed decision. 

If you’re overwhelmed with repayments, get some advice on tackling debt. Taking matters into your hand is brave, but a little help does not harm. 

The Buy Now Pay Later checklist

If you are planning to shop using BNPL, here’s a handy checklist to help you stay on track:

• Avoid using BNPL for impulse shopping. 
• Try paying off the balance as soon as you can. 
• Evaluate the total cost that a BNPL scheme will incur you over its lifetime. 
• Check if the company will push an alert a few days before your interest-free window expires. 
• Keep a regular tab on your credit report to check for erroneous records. 
• If you’re resorting to BNPL because you’ve maxed out your credit options (cards and overdrafts), self-introspect – can you handle any more debt?
• Remember that interest will still be accumulating, even during a payment freeze. Know the costs that you’ll incur. 
• At last, consider the potential negatives of this credit arrangement. Ask yourself how you will cope with the repayments if your income stops. Is it worth taking this risk?