Buy now pay later (aka BNPL aka Going on a Shopping Spree) products like Klarna, Clearpay, Afterpay, and Paypal’s Pay in 3 have become the sexy new thing in fintech and personal finance. BNPL is the fastest-growing payment method in the UK and by 2024 it’s expected that 10% of all e-commerce payments in the UK will be through a BNPL scheme.
All it really is, is a modern reincarnation of a credit card (except they don’t actually call it “credit”). You’re given a short term loan for each individual purchase you make, and you’re able to spread out repaying for it over a period of time, typically at no cost. It’s a great way to manage a large purchase and when used wisely, it’s a good way to shop.
So far, the marketing campaigns from these brands are targeting young women and are encouraging them to spend on new clothes. They’re paying fashion influencers or sponsoring events like London Fashion Week. It’s not surprising then that 75% of users are women and half are between 25-36. What are they buying? 90% of the purchases are clothes and shoes.
Unfortunately, it’s putting a lot of people in debt since they encourage spending and are not very open about the fees you’ll get down the line. Klarna has been getting a lot of pressure from the FCA to regulate its offering as customers are increasingly getting into vulnerable situations. Because some of these services don't charge interest, though some incur late-payment fees, they're not considered credit and have escaped regulation.
We’ll cover some basics here like whether you should use BPNL, what’s the true costs and the risks, and how to manage a situation where you’ve gotten more debt than you can pay for.
Products like Klarna are useful if you *need* to buy something and can’t pay for it upfront. As long as you’re comfortable that you can make the repayments it helps split up the cost, especially if you’re a freelancer with variable income. If you don't know where you next pay check is coming from, maybe don't cop that new pair of kicks through Klarna. And it’s important to only use the products that charge little or no interest, otherwise, they end up costing more than what a credit card would. Look specifically for a payment plan that charges little to no interest. In this case, the Pay in 4 or the Pay in 30 plans would be your best bet.
Another scenario is if you already have a credit card but don’t have a high credit limit. Taking a Klarna loan is better than maxing out a credit card, which can lower your credit score and incur penalty interest rates.
Sometimes you can get a good discount. Klarna has the Pay Now feature in which you pay upfront for the entire thing, but if you're paying through Klarna you could get access to some exclusive deals.
Repayments for the typical products like Pay in 4 with interest-free repayment don’t affect your credit score unless you’re not able to pay them back. Missing a payment or two won't be an issue, but if you default (aka go bankrupt) and miss the payment more than twice, the company will report the information to the credit bureaus. The products that are part of your credit score will be called “financing” and have an interest-rate attached to them. To get approved for those they will need to run a credit check on you, but that won't affect your credit score either. It has a negative affect if you're not repaying on time however.
The Pay in 4 product and those without any interest do not get reported to credit bureaus so it won’t help you build credit either. Yeah....
Don’t let the debt sit and collect fees or high interest. You have a few solutions to pay off the debt with a different type of less expensive credit.
BNPL type products are a good innovation in personal finance, as long as we're informed and use them well. Try to look past the sexy branding and make use of it in a way that’s the best for you.
Illustration by Andrew Nye
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