Have you ever considered using a Buy Now, Pay Later Scheme such as Klarna or ClearPay? Have you used one and found yourself in a difficult financial situation? Find out the potential benefits and risks of them and how we could help you.
What is “Buy Now, Pay Later”?
Buy Now, Pay Later schemes allow you to buy things and pay for them in instalments or one total instalment at a later date without added interest. When paying in several instalments, repayment plans usually last less than one year.
The most commonly seen ones are Klarna, ClearPay and LayBuy but there are new ones every week. Many retail providers offer multiple buy now, pay later schemes available at checkout and they all differ in their terms and conditions regarding credit checks, repayments and late fees.
When you’re financially limited or struggling and want to be able to have enough money for bills, groceries, housing and a social life, being able to delay a payment or pay it in smaller instalments seems really appealing. It can also present itself as a solution to financial problems. However, as with any financial scheme and similarly to credit cards, the use of Buy Now, Pay Later schemes poses some risks to the user.
This is not intended to stop you from using Buy Now, pay Later Schemes. We want to ensure that you are provided with enough information to understand the potential benefits and risks of the scheme in order to make informed decisions of whether they are suitable for you.
What’s The Difference Between Buy Now, Pay Later and a Credit Card?
The short answer is you’re financially less protected/ more vulnerable to financial penalties when using buy now, pay later schemes than when using a credit card. However, both pose significant risks and should be used with caution. If you’re considering getting a credit card, please read the pros and cons from the MoneyExpert website here.
| |
Buy Now, Pay Later Schemes |
0% Credit Cards |
| Credit Check (Type) |
A soft credit check – Provides a simple check of your credit eligibility which won’t impact your credit score or ability to access credit. |
Hard credit checks – Involves a review of your credit history which may impact your credit score or ability to access credit. |
| Section 75 Legal Protection |
No – it is up to the individual buy now, pay later companies individual protection scheme which means you have a legally binding agreement with the company but this will not offer you the same level of legal protection. |
Yes |
| Interest-free period |
Typically within six weeks - always within 12 months |
Between three and 24 months with a new 0% credit card deal |
| Can I Complain to Obudsman? |
Can only complain to the individual providers, not to the Financial Ombudsman Service (FOS). |
You can escalate your complaint to the Financial Ombudsman Service (FOS) |
| Additional fees |
With some providers you’ll be charged late fees if you miss your repayments |
You’ll have a monthly minimum repayment you have to make or face extra fees |
Benefits and Risks of Buy Now, Pay Later Schemes:
Benefits:
- “Free” To Use – Buy now, pay later schemes are almost always completely free to use and purchases typically do not come with added interest of fees (this is not the case for all).
- Flexibility Of In-Store And Online Purchases – Can be used both when shopping online and in-store. Allows for flexibility around your circumstances.
- Makes it Easier To Plan Ahead – Easier to manage upcoming payments as you know what your payment will be and when. Allows for forward financial planning which is a good skill to learn as a student.
- Don’t Undergo A Hard Credit Check – There is no hard credit check carried out, making it easier to buy things you might otherwise not be able to. This, although could be positive in times of need, also opens you up to the risk of buying something which is ultimately beyond your financial means.
- Should Have Set Credit Limits - Every person has a unique set credit limit of spending with whatever buy now, pay later company you go with. This is similar to the way that a credit card works and is dependent on your previous credit history. This is designed to prevent overspending or spending in circumstances where it’s deemed you may not be able to pay it back.
Risks:
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No/ Substantially Less Consumer Protection - Section 75 consumer protection laws help to protect any of your purchases over £100 when using credit services, in the event of faulty goods or non-delivery. With most Buy Now, Pay Later schemes this law does not apply.
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Could Incur Late Fees/ Charges - If you miss a payment instalment you will begin to incur late fees which vary from £6 - £12 in the largest providers. These may be one of charges or you could receive several.
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The Contactless Card – Klarna, the main form of Buy Now pay Later, have just launched a contactless card which allows you to buy something in a shop without paying anything for up to 30 days. Failing to clear what you owe on the contactless Klarna Card could see you referred to a debt collection agency and your card being frozen
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You Might Spend More – a growing area of research is suggesting that you are more likely to spend money if you use buy now pay later schemes and are likely to spend in higher amounts when doing so. The risk of it feeling free or cheaper when you press the buy button means it doesn’t really feel like your spending money. This poses huge risk of you spending money that you may not have or cannot afford further into the future.
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Damage To Your Credit Score – When using a Buy Now, Pay Later scheme, if you miss a payment, it may damage your credit score. This means that a late payment could be noted on your credit file which could negatively affect your future credit options (such as when wanting to take a mortgage on a house).
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You May End Up In Debt – If you are spending beyond your means and spending money you don’t have, this can result in financial hardship and debt. In their 2021 survey, Citizens Advice found that one in 10 buy now, pay later users had been chased by debt collectors in the year leading up to the survey.
Questions to Ask Yourself:
If you find yourself wanting to purchase something using a buy now, pay later scheme then there are some things you should consider first.
- Can I afford the monthly instalments for this item?
- Is my financial situation likely to change and affect my ability to pay my instalments?
- How urgently do I need the item I’m buying, could I wait and save money up for it?
- Am I risking my credit score by making purchases I might not be able to pay back on time?
- Am I risking financial hardship and debt by buying things that I can’t afford?
What Support Can I Get?
If you find yourself in a vulnerable financial position as a result of using buy now, pay later schemes (or for any other reason), you can seek advice from the Student’s Union Advice Centre.
- Find our Top Tips on managing your money here.
- Contact us here.
- Book an appointment with an Advisor here.
- Join our mailing list to receive our Newsletter with regular top tips on money and much more here.
- Visit Turn2US to find out if you’re eligible for any scholarships/ bursaries/ benefits here.
Further Reading:
Buy Now, Pay Later Schemes Key Facts Sheet:
