With the current cost of living crisis driving up prices, we all want to stretch our finances as far as we can. When a purchase becomes necessary, but money is tight, you might be tempted to try a Buy Now, Pay Later (BNPL) plan. These are finance plans that allow you to make a purchase without immediately paying the full amount. But are they worth it?
What is a Buy Now, Pay Later Plan?
Several companies offer to lend money as part of BNPL plans. These are short-term finance schemes that allow you to make a purchase and pay for it at a later date, often in instalments. They are designed to take some pressure off your finances, especially if money is tight.
When you take out a BNPL plan, you are essentially taking out a short-term loan from a credit provider. They pay for the product or service you are buying, and you pay them back. For many people, BNPL plans are a lifeline when unexpected costs crop up before payday. However, they are also used to spread out the costs of luxuries, such as expensive clothes or electronics.
Furthermore, most BNPL plans don’t charge any interest, meaning they won’t cost you anything extra. On the surface, that certainly sounds like a good deal.
Advantages of Buy Now, Pay Later
There is a reason so many people are choosing to use BNPL plans. They offer several advantages and are usually perfectly safe if you use them correctly.
Perhaps the most obvious advantage is that you do not have to pay immediately. This takes some pressure off your finances, especially if you are covering an unexpected cost at the end of the month. Depending on the plan you choose, you may spend a smaller amount initially and split the remainder of the cost over the next two months. Alternatively, you may pay nothing at first and be given a month to clear the debt.
As mentioned above, most Buy Now, Pay Later plans also come with zero interest. This means you will not be required to pay anything extra. The price you see on the product you buy is the full amount you are required to pay. This can be more appealing than loans, credit cards, and other finance options, where you will ultimately pay more than the original cost of the product. These are not the only advantages, however.
Convenient
It can be quicker and easier to apply to a Buy Now, Pay Later plan than it is to get a credit card. This is because BNPL doesn’t require a full credit check. Instead, they will perform a ‘soft credit check’ to ensure you are eligible. This type of credit check will leave no ‘footprint’ on your record, so will not show up when other lenders check your credit score. A BNPL plan can be set up in no time at all, allowing you to start making purchases without waiting for a credit card.
Buy Now, Pay Later is also a convenient way to pay, as outlined above.
No Waiting for Refunds
Another advantage of BNPL plans, depending on the type you choose, is that you can receive your items before you’ve made a single payment. This can give you the freedom to find out whether they work or fit before any money leaves your account, and send them back if they don’t. One method some shoppers use is to buy clothes in several sizes, find out which one fits, and send back those that don’t. Your lender will adjust your payment plan according to which items are returned. This offers a level of freedom to your online shopping without worrying about waiting for refunds.
If you do opt to use this system, however, you should ensure you are clear on your lender’s terms and conditions, as well as those of the company you are buying from. In some cases, it may not be as straightforward as you expect.
Automatic Payment
When you set up a Buy Now, Pay Later plan, you will link your debit card, credit card, or bank account directly to it. This means, when it comes time to make a payment, the amount will be taken out automatically – assuming you have enough in your account. This will take away the worry of forgetting to pay due to being busy and not realising the instalment is due. Automatic payment can help protect you from late fees, which further protects your credit score.
Disadvantages of Buy Now, Pay Later
Of course, no system is perfect. Opting for a BNPL plan can come with disadvantages and is not a clear-cut solution to financial worries. In fact, if you aren’t careful, they could have a negative impact on both your finances and your credit score.
It’s important to recognise your limits when using Buy Now, Pay Later. Knowing you can spread the cost may tempt you to buy more than you can manage. Before you know it, you may be expected to pay more than you can spare from your budget. Therefore, keep your financial situation in mind when considering BNPL. Only buy what you know you can afford.
Late Fees
As alluded to earlier, it is important that you pay your instalments on time. Though most providers will take these payments automatically, this is dependent on there being enough money set aside. Missing a payment could incur additional fees. For some providers, these fees start at as little as £6, but whilst this may not seem a lot they can soon add up.
Furthermore, some providers may add high interest to the next instalment as a penalty for paying late. These interest rates can be much higher than those attached to credit cards and other loans, ultimately costing you far more.
Negative Credit Score
Unfortunately, Buy Now, Pay Later plans don’t tend to benefit your credit score. Paying on time will not make a difference. However, the real disadvantage comes if you struggle to keep up with your payments. Failure to pay your BNPL instalments are reported to the credit bureau, putting a negative mark on your credit score. This negative impact could be even bigger if you default on your payments.
A negative credit score could impact your ability to claim for a loan or other finance options in future. As mentioned earlier, avoid relying on BNPL if you are worried your budget can’t cover the payments.
Lack of Regulation
This is perhaps the main disadvantage of Buy Now, Pay Later plans, though it is set to change. Currently, however, there is no government oversight. This means that people who choose a BNPL plan do not currently benefit from the same consumer protection that covers other finance options.
This means you do not currently benefit from Section 75 protection, which safeguards purchases of £100 or more in the event that they are faulty. Furthermore, if you have a dispute with a BNPL provider, you cannot currently refer it to the financial ombudsman for resolution. This could leave you being forced to take legal action, which can be expensive.
Is Buy Now, Pay Later Worth It?
If you are considering paying for a product or service with finance options, it is important to be mindful of your own limitations. Only take out a BNPL plan if you know you can afford the repayments. Ensure you check the terms and conditions so you don’t get surprised by any additional fees, and make sure you spend responsibly. Just because you have the option doesn’t mean you need to use all the credit you are given.
A Buy Now, Pay Later plan can be ideal for covering those unexpected expenses whilst you wait for your wages, pension, and/or benefits. However, they will not save you any money if you are struggling to cover your bills. Know your budget and think ahead.
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