Should I Use Buy Now, Pay Later And Flexible Payment Schemes?
Please remember this is not financial advice!
Today we answer a question from Tanya. She has been wondering about Buy Now, Pay Later schemes as well as the new flex schemes offered by banks. Tanya would like to know how these schemes impact your credit score.
💥Today on The Wallet:
1️⃣ In 2020 the use of Buy Now, Pay Later services soared to £2.7bn transactions and it continues to be popular with retailers and online platforms. While it’s appealing to shop and not be charged instantly, Buy Now, Pay Later is still a form of credit, so we look at all the pros and cons of using these services.
2️⃣ Buy Now, Pay Later schemes can be controversial. Research shows that consumers are tempted to buy more than they budgeted for when using these schemes, and may not be aware of the terms and conditions they are entering into. That’s why I have three prompts for you to ask yourself before you make a purchase using Buy Now, Pay Later.
3️⃣ We will also compare Buy Now, Pay Later with credit cards and look at what credit checks take place when you enter into a BNPL agreement, as well as how they impact your credit score.
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what is buy now, pay later?
BNPL essentially gives shoppers the option to defer payments for items they want to buy, while allowing the flexibility of paying in instalments with no interest or fees.
With most BNPL providers, you risk being charged a late fee if you miss a repayment.
The BNPL sector is dominated by a few fintech companies (financial technology) like Klarna and PayPal, Clearpay, Laybuy and Amazon.
The use of BNPL soared in 2020, reaching £2.7bn in transactions. More than half (54%) of Brits use BNPL services, and 60% of people don’t regard money owed to buy now, pay later services as “real” debt.
BNPL pros:
If you use buy now, pay later schemes correctly, they won’t charge you extra fees. This means that you can replace your broken dishwasher pronto, and pay for it when your pay check allows you to (or in instalments).
You only ever need to pay for what you actually end up keeping. This can be really handy if you are clothes shopping, for example (but be mindful of the environmental impact).
The sign-up is much faster than for credit cards.
BNPL cons:
Beware of the ecological impact of BNPL -- it facilitates a more impulsive approach to shopping, which allows retailers to sell more.
BNPL makes it tempting to buy more and spend more than you had planned for. Klarna, for example, says that shoppers spend 55% more when they can pay by instalment, and 44% of users would back out of a purchase if these options weren't available.
When you’re making BNPL purchases, it’s not easy to keep track of when you need to make payments, especially if you’ve chosen to ‘slice’ the payment over several months. The amount of interest charged (past the 30 days option/paying in three instalments), varies between different shops and BNPL schemes.
If you miss a month, pay too little or pay late, your fees are likely to jump to as high as possibly 19% (APR).
Using BNPL means losing Section 75 Consumer Protection (even though chargeback is still an option). Section 75 of the 1974 Consumer Credit Act covers purchases from £100 to £30,000. It means your credit card company is responsible, alongside with the supplier of goods or services, for any breach of contract.
Finally, we don’t often think of BNPL as debt, but one in 10 BNPL shoppers have been chased by debt collectors.
credit scores and regulation
A credit score, calculated from your history of using credit, is one of the ways lenders work out how much risk there is in lending to you. It can affect how much you’ll repay on credit and loans.
Klarna claims not to send details of missed payments to the Credit Reference Agencies (CRA). But if you consistently fail to make payments, they could pass your details on to a debt management company and this will show up on your credit report.
If you miss a payment on the longer-term finance plan then this will stay on your credit report for 6 years.
Also, if you default on any of the payment plans, this will also stay on your credit record for six years
The government announced that BNPL would be regulated by the Financial Conduct Authority to protect consumers after a review found there was the “potential for harm”. This means providers will be subject to FCA rules and will need to carry out affordability checks before lending and ensure customers are treated fairly, particularly those who are vulnerable or struggling with repayments.
what about the flex schemes?
Monzo's new product, Monzo Flex, will now be offering its customers up to £3,000 worth of credit.
Like with other BNPL providers, Flex lets customers make interest-free repayments on in-store and online purchases. Monzo Flex allows users to spread the cost of their purchases over three months interest-free.
It also offers a 6-month and 12-month option at a 19% interest rate. Customers can buy anything using the feature as long as the transaction is more than £30 and less than £3,000.
Monzo users can also apply for payment splitting for up to two weeks after the purchase.
You will be slightly better protected with Monzo's Flex than with other BNPL providers. This is because customers who miss a repayment will not be charged late fees, and anyone wishing to use the service will be subject to affordability assessments and credit checks.
You can also file a complaint about Monzo's Flex service to the Financial Ombudsman as Monzo is regulated.
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