Last updated in November 2020
Buy now pay later schemes are becoming ever more popular. You can find them at most major retailers, and their advertising makes them hard to miss. But all too often, adverts do not explain the full truth. This is also the case for buy now pay later schemes.
These schemes can be a lifesaver when payday is still miles away and you need something now. However, they can also lead to a spiral of debt. This article will tell you what you need to know about buy now pay later schemes and how you can use them as safely as possible.
Table of Contents
Buy now pay later schemes: What you need to know
What are buy now pay later schemes?
With buy now pay later schemes, you get what it says on the tin. When you buy something, you do not have to pay for it upfront. Instead, you can repay the purchase amount in instalments over a fixed period.
Buy now pay later schemes are also known as point-of-sale credit and enable you to buy products you cannot normally afford by allowing you to spread the costs. The specifics vary and depend on the specific scheme you are using.
Some may give you 30 days to repay the money, for others it may a one or two years. Interest rates also vary with some being interest free entirely. On the other hand, some may also charge very high interest rates of over 20%.
Difference to credit cards and loans
Buy now pay later schemes are not the same as credit cards and loans. the most obvious difference is that with buy now pay later schemes, your credit is limited to a single purchase.
On the other hand, with a credit card or a loan, you can spend your credit on whatever you want, making multiple purchases from different companies.
In terms of repayment, buy now pay later schemes are more like loans than credit cards. You do not have to pay off the whole balance at the end of the month (unless your repayment period is 30 days).
Most commonly, you can choose to pay fixed rates to pay off your debt during the interest-free period. Alternatively, you can make minimum payments and spread the cost over a longer time frame. For the latter, you will pay interest at a rate set by the provider.
Buy now pay later schemes are on the rise
Because of their convenience, buy now pay later schemes have been increasing in popularity. The sector is growing at a rate of 39% per year, with its market share being expected to double in 2023.
And this is not without reason. Overall, 9.6 million people in the UK said they specifically avoided buying from retailers that do not offer a buy now pay later scheme. Additionally, a whopping 8.6 million people in the UK plan to use these schemes in the future.
In terms of age groups, buy now pay later schemes are more popular amongst younger people. Over half of all millennials in the UK (54%) use these schemes and Generation Z is closely following this trend.
This may be because younger people are more open to new payment methods, are more likely to shop online, and have less financial resources (less savings).
Terms of popular schemes
According to data from Finder, the most popular schemes are Klarna by a large margin, My Argos card, Clearpay, Laybuy, and Openpay. Paypal has also recently entered the buy now pay later market and has the potential to go head to head with Klarna given its popularity.
|Klarna||My Argos card||Clearpay||Paypal|
|Interest free available?||Yes||Yes||Yes||Yes|
|Interest-free period||30 days||6 months||2 months||4 months|
|Max. period||36 months||12 months||2 months||24 months|
|Late payment fees||None||£12||£6-£12||£12|
|Credit limit||None||Individually assessed||£800||Individually assessed|
The debt trap
As you can see from the table above, all major providers offer an interest-free period. If you repay your credit within this time period, buy now pay later schemes are free to use for you and will not pay anything extra.
However, many people start off with good intentions and then just end up making minimum repayments. At times, this may be their own fault with their poor money management to blame. However, at other times, accidents and emergencies may happen that are out of people control.
Therefore, there is always a risk that you may not be able to repay your balance in full within the interest-free period. And after that, the interest rates can be high.
Clearpay is the only provider that will never charge interest but given that the maximum period is only two months, it may not be useful for people who are financially more vulnerable.
Therefore, there is a real risk of accumulating debt through these schemes if you are not careful. You may feel like you have more money than you do because you do not need to make a payment now.
Thus, you may end up making more buy now pay later purchases, rendering you unable to keep up with the minimum repayments.
Additionally, many young people (20%) do not regard debt from buy now pay later schemes as real debt equivalent to credit card debt. Neglecting any type of debt is never a good thing and may send you into a debt spiral.
Buy now pay later schemes and your credit score
Not being able to keep up with the repayments can damage your credit score. In fact, more than two million adults in the UK have damaged their credit score by using delayed repayment schemes.
Like with any other debt, a missed repayment will show up in your credit report which can impact your credit score. These missed repayments are also visible to other lenders who may deny you any future credit based on this.
This may render you unable to get a mortgage, take out loans or credit cards, or get a phone contract. Plus, it may cause you damage of psychological nature including anxiety, worry, and depression.
The good news is that when providers assess your for eligibility of buy now pay later schemes, they do a soft credit check. This is opposed to hard checks and will not impact your credit score.
In fact, if you are using delayed repayment schemes responsibly, you can even improve your credit score. This is because by making your repayments on time, you show future lenders that you are trustworthy and reliable.
However, before considering buy now pay later schemes to improve your credit score, you should make sure that you can definitely repay the full balance before the interest-free period ends (i.e. make more than just the minimum payments), otherwise, the money you lose is not worth the small improvement in your credit score.
Why these schemes may be useful
As you can see, buy now pay later schemes are not inherently evil. They can be a good solution to improve your credit score if you are using them to buy products you want or need to buy anyway.
This is because they are absolutely free to use. There are not many ways to build your credit score for free, most require you to take out a loan with associated interest, or a contract such as for a mobile phone.
Additionally, there are other scenarios in which delayed repayment schemes may be useful. For example, in emergencies. You may have an important job interview coming up and not have suitable clothes and no one you can borrow from. Or your fridge may suddenly break down.
In both cases, buy now pay later schemes may be worth it, even if you cannot repay them completely within the interest-free period. This is because
- a) the salary from the new job is likely to be greater than the overall interest
- b) the overall interest is likely smaller than the cost of eating takeaways every day
Lastly, buy now pay later schemes can be helpful when online shopping. Sometimes you may be unsure of what size to buy, for example for clothes, and these schemes may enable you to buy several sizes without being out of pocket.
Then, you can try on all sizes and send back those that do not fit. This is much more convenient than having to wait for a refund.
How to prepare before using delayed repayment schemes
If you have decided to buy a product and pay for it later, it is important to take some steps to ensure you minimise the risk associated with buy now pay later schemes.
- First, you should have an emergency fund. This will cover you in case of any unexpected expenses and ensure you can still repay your credit. Typically, an emergency fund should have sufficient funds to cover all your necessary expenses for three months.
- Secondly, you should consider whether you really need to buy the product now. It may be easier to wait a few months until you have saved up enough money to buy the item outright. This way, you have no reason to delay your repayment.
- Thirdly, if you still want to use a buy now pay later scheme, familiarise yourself with the terms and conditions. At the very least, you should now when the repayments are taken from your account and when the interest-free period ends.
- Fourthly, look ahead and make a repayment plan. This should consider your future income as well as other expenses you may have. If it does not look likely that you can repay the full sum before the interest-free period is over, it is best not to make the purchase.
- Lastly, after you have made the purchase, monitor your bank statements. It is not unheard of that buy now pay later providers do not stop to take money from you after you have repaid the full balance. This is because their administration is slower rather than malicious intent. But nonetheless, you will have to contact your provider to get your money back.
Instead of delaying payment, you may want to make some extra money to cover your purchases. One way to quickly make a few hundred pounds is matched betting. Matched betting is completely legal as long as sports betting is allowed in your country and not gambling.
In essence, matched bettors place bets that cover every outcome of a sports match and make a profit from bookmaker promotions such as free bets. The concept may sound confusing but once you get used to matched betting, it is as simple as clicking a few buttons.
With matched betting, I managed to earn over £12,000 since I started. This laid the foundation of my financial independence fund and inspired me to blog. You can read my free matched betting guide if you are interested in making tax-free money from home.
If matched betting is not for you, consider setting up another side hustle. For example, you could re-sell items on eBay. You can easily start with this by selling items you no longer need.
Buy now pay later schemes summary
Buy now pay later schemes enable you to make a purchase without paying for it immediately. The concept differs from bank loans and credit cards because you generally make fixed instalments. However, the debt associated with buy now pay later schemes is the same.
These delayed repayment schemes are becoming more popular and may be a gateway to debt due to high interest rates and easy access. However, buy now pay later schemes also have positive aspects.
Namely, they can help you build your credit score, save you during an emergency, and make it possible to buy multiple sizes of clothes (or other products) and sending them back without being out of pocket.
However, if you plan to use buy now pay later schemes, you should ensure you are prepared in advance and able to repay the full balance within the interest-free period.
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