Buy Now, Pay Later (BNPL) enables you to spread the cost of a purchase over an agreed period. It can be a convenient and flexible way to pay for something that you may not be able to afford upfront, like an unexpected home or car repair.
But can you use BNPL if you’ve got a poor credit rating? Or will you be refused because you’ve had past debts?
How does Buy Now, Pay Later work?
Buy Now, Pay Later (BNPL) is an agreement that allows you to purchase products in instalments when you shop at an e-commerce website, app, or, increasingly, a brick-and-mortar store.
BNPL might be the preferred choice for more customers at the checkout because it allows you to purchase an item before paying the full amount, but it’s important to remember that it is a form of credit and there can be serious consequences for not repaying what you owe.
There are various BNPL providers available in the UK, but the main ones are Klarna, Clearpay, and PayPal Pay in 3. Most solutions work by putting down a deposit and spreading the remaining value of the purchase over a fixed period on a regular basis, usually weekly or monthly, until the purchase price has been paid in full.
For example, if you purchase a £90 coat with BNPL, you might pay £30 at the point of purchase, £30 after 30 days, and the final £30 to complete the total amount after 60 days.
The process can usually be described in three key steps:
You purchase a product
BNPL is available as a payment option at most online retailers and, as of late, some physical shops. When you select it, you’ll usually need to pay a small down payment of around 25% of the total purchase price.
You borrow money to fund the purchase
Once the purchase has been completed, you’ll enter into a credit agreement with the provider. You’ll then be informed of your payment schedule, which you must stick to.
You repay the lender
Most providers only offer automatic payments to minimise the risk of defaults, so your payments will usually leave your bank account automatically on the same date each month.
How much debt do you have?
Will Buy Now, Pay Later affect my credit score?
Some consumers wrongly assume that BNPL won’t affect their credit score as long as they make their monthly payments.
However, while credit reference agencies will now include details of any short-term BNPL transactions on your credit file, it should have no immediate impact on your credit score. This is merely so lenders are aware of your borrowing activity and to allow credit reference agencies to update their credit scoring systems accordingly.
If you miss payments on a BNPL option, this may also negatively affect your credit score, but this depends on the provider and whether or not they provide information to credit reference agencies. For example, Klarna claims that late and unpaid balances will be visible on your credit file and to other lenders, while PayPal has stated that while they share information with TransUnion, this won’t affect your credit score.
Clearpay doesn’t currently report to any credit reference agencies, but if you miss payments and your debt is passed on to a collection agency, this can have a negative impact on your credit score.
Does Buy Now, Pay Later require a credit check?
The short answer is yes. Usually, you’ll be subjected to a credit check when you try to use BNPL, which you’ll need to pass to be able to use it. As well as assessing your financial status and affordability, this process will also be used to confirm your identity and rule out fraud.
However, this will usually only be a soft credit check, which means that while it will be listed on your credit report for 12 months, it will only be visible to you.
In rare cases, a hard credit check will be carried out if you apply for a long-term loan, but you must be informed before this happens. This will be listed on your credit file for up to two years and will be visible to anyone viewing your credit history.
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Can I get Buy Now, Pay Later with bad credit?
As with most credit products, it can be difficult to get accepted for BNPL with poor credit as it indicates that you’ve struggled financially in the past and might struggle to afford monthly payments on another credit agreement. Even if you are approved for BNPL with bad credit, you could be subject to lower spending limits.
However, because there is no minimum credit score required and most BNPL providers only perform a soft credit check, which only provides a high-level view of your finances, they likely won’t see any late payments or hard enquiries from other lenders that could affect their decision to lend to you.
This means that, depending on the provider and the type of agreement, you should be able to get BNPL with bad credit. In fact, making your BNPL payments in full and on time can help you build credit.
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What happens if I don’t pay my Buy Now, Pay Later agreement?
Financial emergencies can be unpredictable, but it’s important that shoppers only select BNPL if they’re confident they’ll be able to make the agreed payments on the agreed dates.
Remember, BNPL is effectively a form of short-term lending, so missing a payment could have a detrimental impact on your credit score if the lender reports the defaulted account to the credit reference agencies or late or missed fees are added. This is why it can be advantageous to choose a BNPL provider that only offers automatic payments and has no hidden fees.
Some BNPL providers also charge interest if you miss payments and rates for this type of borrowing are typically high, meaning BNPL debt can become increasingly unaffordable the longer it goes unpaid. To avoid confusion, it can be beneficial to familiarise yourself with the terms of your agreement as soon as possible.
Even if you don’t miss a payment but you pay it late, you could be subject to late fees. For example, Klarna charges £5 each time payment isn’t made on the specified date and you’re limited to two late fees per agreement. However, you’ll be given a seven-day grace period before any late fees are added, during which time you’ll get several reminders.
Clearpay, on the other hand, charges £6 for a late payment and a further £6 if the balance remains unpaid seven days later. PayPal doesn’t charge late fees but missing payments can cause your balance to become overdue, which can make it difficult to access further credit or qualify for Pay on 3 again.
If you think you’ll be unable to pay your next BNPL instalment for whatever reason, it’s crucial that you contact the provider as soon as possible by visiting them online or calling them. Some providers, like Klarna, offer the option to extend your due date so you can still make the payment, just at a later date that’s more manageable for you (e.g. after you’ve been paid).
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Conclusion
Buy Now, Pay Later (BNPL) is a form of short-term credit that gives you the ability to spread the cost of a purchase from a range of retailers over a specified period.
Most BNPL services require a deposit of around 25% of the total cost and subsequent monthly payments. The average repayment period is between three and 12 months.
BNPL shouldn’t harm your credit score, but you could be subject to further action if you fail to manage your repayments as agreed and the debt is passed to a collection agency.
