Buy Now, Pay Later Debt Help & Advice

However, while BNPL can be an effective way of making purchases you otherwise wouldn't have been able to afford, there can be serious consequences for missing repayments and you might end up paying more overall due to extra interest or late fees.

This article will outline BNPL debt in more detail, including what can happen if you fall behind on your BNPL payments, whether you can use BNPL while in a debt solution, and how to use BNPL responsibly.

What is Buy Now, Pay Later?

Buy Now, Pay Later (BNPL) is a form of short-term credit that allows you to make a purchase now but pay for it in smaller instalments over a fixed period (usually up to 12 months). If payments are made in full on the correct date, a BNPL loan typically doesn't incur additional interest or charges.

For example, if you want to purchase an item that costs £100 but can't afford it until you get paid, BNPL could allow you to purchase the item now for 25% of the total cost (£25) and pay the remaining £75 over time (£25 each month for the next three months).

The payments are almost always taken from your bank account, debit card, or credit card automatically on set dates, meaning you don't have to do anything to ensure you make your repayments on time.

However, if you don't stick to the payment plan you agreed to or you don't have the funds to cover your repayments, you could face late fees. This could mean you end up repaying more than you owe and, more importantly, more than the item would have cost had you paid for it outright.

BNPL loans can be used to purchase a wide range of goods and services both online and in-store, such as groceries, clothing, electronics, furniture, holidays, vehicles, and event tickets.

The biggest BNPL providers in the UK are Klarna, Clearpay, Afterpay, and Zilch. Some banks and online payment companies have also started offering BNPL services, including PayPal, Monzo, and Revolut.

How does Buy Now, Pay Later work?

The Buy Now, Pay Later process is relatively straightforward and in most cases, it's easy to get approved. We've outlined the basic steps below:

• You make a purchase with BNPL - When you make an online purchase, you'll be asked to choose your preferred payment method. If BNPL is chosen, the BNPL provider will perform a soft credit check to confirm that you're in a position to make the agreed repayments - approval is usually granted in seconds.
• You make a small down payment - Once the BNPL agreement has been confirmed, you'll be asked to make a down payment to allow you to purchase the item. This can vary but is typically between 25% and 50% of the total price.
• You make regular payments for a set time - The remainder of the purchase price is then spread over a set period, which will be communicated to you at the point of purchase. In most cases, the item will be fully paid for within 12 months.

What are the advantages of Buy Now, Pay Later?

BNPL offers several benefits, which we've outlined below:

It's accessible

One of the main advantages of BNPL is accessibility. Most online retailers offer BNPL as a payment method and unlike other forms of credit, it's usually quick and easy to get approved.

This makes it a viable option for individuals who need to make a timely purchase that they otherwise wouldn't be able to afford, such as an emergency home or vehicle repair.

It can split up large expenses

BNPL is designed to give consumers the chance to make a purchase regardless of their financial situation.

By spreading the cost of the item over a prolonged period, you can manage your cash flow and budget more effectively and make necessary purchases without having to wait until payday.

It's often interest-free

BNPL is usually interest-free as long as you make payments in full and on time. Some agreements are interest-free, but only for the first 12 months.

This means that, if you repay the cost of the purchase in less than 12 months, you will likely avoid interest.

It can prevent debt

For some, BNPL can prevent debt. For example, if an emergency expense arises and you don't have the funds to pay for it, BNPL can allow you to spread the cost instead of borrowing money to cover the cost.

Failure to repay a loan can lead to you accruing further interest and late fees, which is a slippery slope to problem debt.

What are the disadvantages of Buy Now, Pay Later?

BNPL can be a lifeline for many, but it also comes with its drawbacks. We've outlined the main disadvantages below:

It can be easy to get carried away

One of the biggest complaints about BNPL is how easy it can be to get carried away. Because you only need to make a small down payment to complete a purchase, many people forget that they still have to pay the remaining amount.

It can trigger penalties

Though most BNPL payments are automatically deducted, not having sufficient funds in your bank account can trigger late fees and penalties. This can mean you pay back more than you originally borrowed.

It can be difficult to receive a refund

When you make a purchase with BNPL, you'll automatically be entered into an agreement with both the retailer and the BNPL provider. This can make it difficult to receive a refund and, if the item arrives defective or damaged, you'll likely need to communicate with both parties.

It's still an unregulated industry

The BNPL industry is still largely unregulated, which means you won't benefit from the same protections you would if you were to take out a credit card instead, for example. However, as the popularity of BNPL grows, stricter regulation is expected to come into force this year.

How will Buy Now, Pay Later affect my credit score?

Like most forms of credit, BNPL can affect your credit score.

For example, if you fail to make repayments on time because you don't have enough funds in your account, the missed or late payments will likely be noted on your credit file and cause your credit score to drop.

Furthermore, if your credit score is already damaged or you have made too many credit applications in the past, your application for BNPL could be rejected. This might also happen if you've had multiple BNPL agreements and have missed payments on all of them.

However, in some cases, using BNPL sensibly could improve your credit score as it proves to future lenders that you're a responsible borrower and are capable of sticking to a credit agreement.

Remember, most BNPL agreements only require a soft credit check, which doesn't impact your credit score. Some BNPL providers perform hard credit checks, which do affect your credit score, but this is usually only for agreements that last for more than 12 months.

What happens if I have Buy Now, Pay Later debt?

BNPL is still a relatively new form of credit but the consequences of missing payments are similar to if you default on any other form of credit.

However, the ease of accessing BNPL can mean most people don't even see it as a form of credit and use it without any knowledge of the potential consequences that can arise.

Several things can happen if you accumulate BNPL debt, which we've outlined below:

Payment reminder

If you fail to make monthly repayments on time, the BNPL lender will usually send you payment reminders asking you to make up for the money owed. They might also add late payment fees to your outstanding balance at this stage.

Most BNPL providers also send payment reminders before the original repayment date to reduce the likelihood of you missing payments altogether.

Default notice

If you don't respond to the BNPL provider's attempts at reaching out to you and continue to miss payments, you could receive a default notice warning you that you're at risk of defaulting. This is when your account is closed due to continuous non-payment.

Once your account has defaulted, credit reference agencies will be informed and it will be listed on your credit report.

Debt collection

If you're in arrears, the BNPL company might pass your debt to a collection agency with more time and resources to collect the money owed.

Remember, debt collection agencies are more persistent than lenders and will continue to contact you until you repay what you owe or come to an agreement over how to make up for the missed payments.

Legal action

If the BNPL company's efforts to resolve the debt are unsuccessful, they might take legal action against you. This could involve taking you to court and serving you with a County Court Judgment (CCJ) which, if left unpaid, can lead to further legal action or bailiffs visiting you.

In serious cases, the money owed could be deducted from your wages before you can access it.

Can I use Buy Now, Pay Later if I'm in a debt solution?

If you're in an existing debt solution and are making regular payments towards what you owe, it's not advised to seek further credit unless it's absolutely necessary. However, there is nothing stopping you from using BNPL if you pass a credit check and your application is approved.

It's also important to check the terms and conditions of your debt solution before applying for any type of credit, including BNPL.

For example, some formal debt solutions, such as an Individual Voluntary Arrangement (IVA), prohibit you from applying for further credit until you've completed your arrangement.

In most cases, it's best to focus on repaying your current debt before entering into any new credit agreements. This can allow you to better manage your finances and avoid further financial problems.

How can I use BNPL responsibly?

BNPL can be a way to spread the cost of a purchase over a prolonged period and avoid debt, but only if it's used responsibly. Here are some ways you can use BNPL sensibly:

Limit your applications

Unlike credit cards, you can't make a minimum payment towards your total BNPL expenses at the end of each month. Instead, you must repay each individual purchase in full on the expected due date.

Therefore, the more BNPL purchases you make, the more difficult it can be to juggle various due dates. Even if you can afford multiple BNPL agreements, it's recommended to only stick to one or two at a time.

Avoid unnecessary purchases

The more money you spend on unnecessary purchases using BNPL, the more likely you are to default and get into debt, which can cause significant damage to your credit score.

This can lead to a situation where you don't have the available funds to pay for an emergency home or vehicle repair and are forced to borrow money to cover the cost.

Stick with reputable providers

The BNPL industry is still widely unregulated compared to the credit card and loan industry. Therefore, there are few protections to cover you in the event something goes wrong (e.g. you need to return the item or have been a victim of fraud).

Regardless of whether you're using BNPL for the first time or are a frequent BNPL user, always stick with reputable providers.

Read the fine print

No matter which BNPL provider you choose, you must always read the fine print.

Once you enter an agreement, you should be given a document that clearly outlines your total repayment amount, potential interest rate, and monthly payment schedule.

Set payment reminders

Most BNPL payments are automatically deducted on a fixed date.

However, you must ensure you have enough money in your account before the money is taken to avoid missing a payment. This can incur late fees and you might have to pay interest.

What are some alternatives to Buy Now, Pay Later?

BNPL might seem like a quick and easy way to finance a large expense, but it isn't the only option available to you. Here are some of the most common alternatives to BNPL:

Credit cards

One of the most common alternatives to BNPL is a credit card. However, there are some key differences that you should know about if you're considering either option.

For example, it usually takes longer to get approved for a credit card, but they tend to come with more protections.

Most lenders also perform a hard credit check to determine your creditworthiness, which can temporarily damage your credit score - especially if you're rejected.

Personal loans

Another common alternative to BNPL is a personal loan. However, the main difference between BNPL and personal loans is that most personal loans come with interest.

The interest rate on a personal loan can differ depending on your income, credit score, and individual circumstances, but typically ranges from 3% to 30%.

Conclusion

BNPL can help you spread the cost of a good or service, allowing you to make a purchase even if you don't have the funds readily available. Most BNPL terms last 12 months and require a down payment of at least 25% of the total purchase price.

BNPL debts can arise if you don't stick to your agreed repayment schedule and fail to come to an agreement with the BNPL provider. It's important to only use BNPL if you're confident you'll be able to make the repayments as they're due.

The key to managing BNPL responsibly is reading the fine print and sticking to the agreed terms and conditions. If you're worried about BNPL, don't hesitate to contact a financial charity or organisation for debt advice and support, such as Citizens Advice or the Financial Ombudsman.