How does buy now pay later work? Buy now, pay later. It seems simple enough but how does buy now pay later work in reality for most people?
Buy Now Pay Later (BNPL) has surged in popularity over the last year. At the time of writing, the BNPL company Klarna, puts it’s users at 147M global shoppers, 400k retail partners and 2m daily transactions. With BNPL payments in the UK expected to reach approximately £96.7 billion by 2028.
This means that we could be on our way to a major BNPL debt crisis. With over 60% of BNPL product users citing worries that it may be making it too easy to overspend and get into debt. In recent history we have seen a number of financial lending trends, such as pay day loans. Buy now pay later actually seems like a significantly better option. However, it definitely seems prudent to ask if it’s not just debt that’s better packaged and marketed?
Please note: This is articled in sponsored and created in collaboration withHSBC. This article contains sponsored and affiliate links. This should not be considered as financial advice, you are responsible for your own financial decisions.
How Does Buy Now Pay Later Work
Buy Now Pay Later is offered as a method of payment by companies such as Klarna. In fact, some of the UK’s biggest brands are already using In-store to boost their business and enhance the shopping experience. This includes the likes of New Look, Halfords and H&M. It even bridges the gap between the virtual and physical world. With the flexibility of online shopping, now in your physical store.
Buy now pay later is an offer that allows customers to purchase items without paying for them immediately. The customer then has the option to pay for the item at a later date. There are generally 3 ways of paying:
Pay later: there’s usually an interest-free period of between 14 and 30 days. But if you don’t pay on time, it can get very expensive as you might be charged late payment fees.
Pay in instalments: the amount you owe can be repaid over several months in smaller chunks sometimes called ‘slices’. Again, if you miss payments you could be hit with late payment fees.
Pay on finance: this works the same way as a loan and a hard credit check will be done.
Research from HSBC shows BNPL (buy now pay later) is the second most-used form of finance behind credit cards. Credit cards are still the most popular form of finance (69%), but BNPL is now second (32%). This puts BNPL ahead of current account overdrafts (27%), retail finance (15%) and personal loans (13%). This means it’s a big deal.
What’s The Problem With Buy Now Pay Later?
Debt charities have issued calls for concern. Highlighting some worrying key trends in the Buy Now Pay later industry. For a start there seems to be a lack of understanding around Buy Now Pay Later products. According to Citizens Advice, over 40% of those who’ve used BNPL don’t think of it as ‘proper’ borrowing with:
26% have regretted using a BNPL product.
39% used it without realising.
42% didn’t fully understand at least one part of what they were signing up for.
41% have struggled with making a repayment.
More than 1 in 3 of those who have used BNPL said they found out about it when it was offered as a payment option (35%). This is an especially concerning statistic when you combine it with the number of people (40%) who don’t see it as proper borrowing.
This disproportionate figure, suggest a lack of accountability for those offering it as a payment option. Whilst the credit card industry is highly regulated, buy now pay later perhaps needs more oversight. Which is what the government are currently reviewing.
As a result of thigs, many people use it without realising and many don’t properly understand what they’re agreeing to. It’s no surprise then that more than 40% have struggled with making a repayment. When we’re asking how does buy now pay later work, we have to remember it’s not a one-size-fits-all answer. Everyone’s finances look very different.
Buy Now Pay Later And The Cost Of Living Crisis
The cost of living crisis is also forcing people into using Buy Now Pay later to cover basic essentials. According to Citizens Advice, 1 in 12 people said they were now using Buy Now Pay Later to cover basic costs such as food shopping. The debt charity StepChange has also voiced concerned about buy now pay later being used for household bills.
This means, that people are falling into debt trying to cover their basic costs. With segments of the population are more at risk than others. For example, HSBC found that women are more than twice as likely as men (43% v 21%) to use BNPL.
It could be the case that BNPL is targeted more successfully at products women tend to buy. Alternatively, Women might be using BNPL to cover the cost of living due to income inequality (e.g. gender pay gap). We would really need some further research to understand this gender difference.
Buy Now Pay Later Is Popular With Millennials And GenZ
Buy Now Pay Later is also most popular among 25-34-year-olds, with nearly half saying they had used it in the past year (49%). This is followed by the 18-24s (45%) and 35-44s (45%). We also know that 87% of those people who used BNPL in the past 12 months said they were likely to use it again in the next year.
This has two implications. Either 25-34-year-olds simply prefer the features of BNPL or they require this easy-access credit to cover their cost of living. For example, those using BNPL said they valued it over other forms of finance. This is because of the ability to spread payments (20%), they find it quick and easy to use (15%) and more affordable (13%).
Is The Buy Now Pay Later Industry Being Overly Demonized?
Buy Now Pay Later is a financial product that helps many individuals cover a gap in their finances. Often, these are caused by external geopolitical factors. For example, the war in Ukraine and energy price rises. It’s a simple solution to hate on a financial product instead of fixing issues in our society. Rather than impose strict energy price caps like in France, the cost is imposed on the individual.
This is the same with Credit Cards, which are also often demonized as causing people to get into debt. I come from a family with a history of debt and credit card abuse. However, with the right financial education credit cards are a useful tool. Used responsibility they can be used to manage cashflow and earn rewards. Credit cards also come with financial protections.
<Explore: How To Avoid Overspending And Hit Your Savings Goals In 2022 >
Remember To Watch Your Credit Score
Despite, my family history I now have a Clearscore Credit Score of over 720 out of 1000. You can also use Money Super Market Credit Monitor to keep an eye on your credit score. In my opinion, both Buy Now Pay Later or Credit Cards can be used to manage your finances.
The most important thing is to educate yourself on how these products work before you use them. If you don’t understand, then seek financial advice on the matter. Remember, BNPL can also impact your credit score now.
The better your credit score the more options you have when it comes to financing options. For example, when I book my next holiday, I might use something like Premier Credit Card. This offers 9 months interest free on purchases plus reward points. Which means I can spread out my repayments to save burning through cash all in one month.
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Should You Use Buy Now Pay Later Products?
Buy Now Pay Later might entice you to buy products that you might now otherwise be able to afford, or even want in the first place. As we’ve seen from the HSBC research it’s often marketed at young people who might not understand the full financial consequences.
This isn’t to say that these payment methods can’t be legitimately useful. For example, one of the most popular items to buy using BNPL are clothes. One of the reasons is because you can buy the item in three sizes and return two before the first payment goes out. You can then spread the payment of the one you decide to keep.
BNPL schemes should however only be used if you would buy the item anyway. If you afford and know how to make the repayments then you are set. HSBC has put together a list of questions to ask yourself before making a purchase with BNPL.
Buy Now Pay Later isn’t necessarily a bad option. You can make a purchase at 0% interest and pay it back over 3 months. You can buy something worth £30 and that’s only £10 per month. The insidious issue is what happens when make a purchase at 10x £30 purchases. That’s an extra £100 per month on top of all your other bills.
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How Does Buy Now Pay Later Work: Visit The HSBC Website To Find Out More
To conclude, BNPL isn’t a bad product but you do need to understand it fully. Therefore, you should find out what you need to know about Buy Now Pay Later on HSBC’s dedicate page. This covers the pros and cons of BNPL along with what financial protections you have. They can point you towards a number of budgeting tools or alternative ways of borrowing money. This includes 0% credit cards or overdrafts.
If it’s managed correctly and you never miss a payment, BNPL can be a free way to borrow money. But keep in mind, any remaining instalments are automatically taken from your account at set dates – and missed payments can lead to:
late payment fees
going over your overdraft limit
damage to your credit rating if you’re late or miss payments
Don’t skip learning more about how Buy Now Pay Later works. Definitely check out the HSBC BNPL page to check you fully understand Buy Now Pay Later. Don’t risk getting into debt, when you have other options.
Further Buy Now Pay Later Resources:
Business Wire: https://www.businesswire.com/news/home/20220214005573/en/United-Kingdom-Buy-Now-Pay-Later-Market-Report-2022
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