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Published 20 December 2023
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How Does Buy Now, Pay Later Work?

Buy now, pay later schemes offer shoppers the chance to delay paying for their goods up front or to split the cost over monthly instalments. Read on to find out how they work and whether they impact your credit score.

Buy now, pay later (BNPL) refers to a type of borrowing that lets you purchase items and pay for them at a later date, or in instalments. Many retailers offer customers the option to delay or split their payments for goods through this sort of credit agreement.

And a new generation of buy now, pay later providers, such as Klarna and Clearpay, have emerged as more of us choose to shop online.

Used correctly, buy now, pay later schemes can help spread the cost of your purchases and help improve your credit score.

However, missing payments could harm your credit score and affect your chances of being approved for loans, mortgages or credit cards in the future.

Read on to find out more about how buy now, pay later schemes work.

Rise in buy now, pay later

Buy now, pay later (BNPL) is becoming an increasingly popular payment method. Figures from the financial regulator, the Financial Conduct Authority (FCA), revealed it may be a popular payment method in the build-up to Christmas with more than a quarter (27%) of UK adults using BNPL at least once in the six months to January 2023. 

However, using it can affect your credit score – Klarna, for example, started sharing information with credit agencies about which of its users pays on time and who falls behind as of June 2022. 

How does buy now, pay later work?

Buy now, pay later schemes allow you to shop for goods and pay for them at a later date.

Buy now, pay later providers, such as Klarna, ClearPay and Laybuy, let you spread the cost of shopping through two types of payment options:

  • Pay later: You can delay paying for your items for an agreed period of time, usually between 14 and 30 days.
  • Paying in equal instalments: Your online shopping bill is split into smaller chunks that can be repaid over several months.

Most buy now, pay later schemes offer interest-free repayment periods. But you may be charged interest and late fees if you miss repayments. Your buy now, pay later account may also be suspended if you don’t repay on time and the lender may use debt collection agencies to recover what you owe.

So it’s really important to understand the terms of a buy now, pay later scheme before signing up. As with many financial products, the terms and conditions of buy now, pay later schemes can be challenging to read. So if you’re unsure of any details, get in touch with their customer service team to find out more.

Do buy now, pay later schemes appear on your credit report?

In February 2022, TransUnion became the first UK credit reference agency to announce that it would include buy now, pay later agreements on customer credit reports.

This means that if a lender checks your TransUnion credit report when you apply for a credit card, mortgage or loan, they will be able to see details of the buy now, pay later schemes you use and your full repayment history.

TransUnion confirmed that BNPL agreements will appear on credit reports from summer 2022.

Equifax also has plans to include BNPL data on credit reports in the future. Experian says that it already works with several BNPL providers to help them with affordability checks and will continue to do so.

Does buy now, pay later affect your credit score?

Buy now, pay later schemes can harm your credit score if you miss repayments. Missed payments can be recorded on your credit report for up to six years and will be visible to other lenders. This could hurt your chances of being approved for new credit, such as loans, credit cards and mortgages.

Applying for too many buy now, pay later schemes can also damage your credit score. Some buy now, pay later schemes run a hard search on your credit report, which leaves a mark that is visible to other lenders.

Having lots of hard searches recorded on your file may suggest to lenders that you are struggling financially and may not be able to afford repayments. This could lead to your credit applications being rejected, which will bring your credit score down.

On the other hand, using buy now, pay later schemes responsibly can have a positive impact on your credit score. Repaying on time shows lenders you are good at managing money and don’t rely exclusively on credit.

» MORE: Find out what affects your credit score and why

Check your credit score before using buy now, pay later

As with any line of credit, it’s important to check your credit score before applying for a buy now, pay later scheme. There are lots of ways to check your credit score and credit report.

You can check your credit score for free with Experian, which offers a free account with a monthly view of your credit score. You’ll have to upgrade and pay a monthly subscription for a more detailed credit report or to check your score more frequently.

Equifax offers a 30-day free introductory trial for you to view your credit score and credit history. You’ll have to pay a monthly subscription fee to continue seeing your credit score and report. With TransUnion, you can access your credit score for free through Credit Karma.

Each credit reference agency has to offer a free statutory credit report by law. A statutory credit report is a basic summary of your credit history and doesn’t show your credit score. It includes information about your credit agreements, missed or default payments and electoral roll details.

Importance of a good credit score for buy now, pay later schemes

As a general rule, a higher credit score will improve your chances of being accepted for new credit, including BNPL schemes. It shows lenders that you are a reliable borrower and have a good track record of repaying your debts on time.

It’s important to keep on top of your credit score because it influences most aspects of your financial life.

For instance, you may need to apply for a mortgage if you’re thinking about buying a home. Lenders will look at your credit history, among other factors, when deciding whether to approve your home loan application.

Similarly, if you wanted to buy a new motor, you may need to apply for car finance. Most lenders will use your credit history as a factor, when trying to gauge if they should accept your application.

And, when it’s time to get car insurance, your credit score could affect how much interest is added to your monthly premium if you pay by direct debit.

A higher credit score can also give you access to a wider range of financial products with lower interest rates and higher credit limits.

Typically, a lower credit score limits your credit options and can reduce your chance of being approved for a BNPL scheme. That’s because a lower score suggests to lenders that there is a risk you won’t be able to repay your debts, based on how you have handled credit in the past.

Check the terms before signing up to buy now, pay later

Buy now, pay later schemes can be a tempting way to pay for your shopping, but it’s important to check the terms before signing up.

A recent NerdWallet investigation revealed that some buy now, pay later terms and conditions are challenging to read. The average policy document takes about 36 minutes to get through.

So don’t feel put off or overwhelmed if you are confronted by lots of text. If anything is unclear, get in touch with a lender’s customer service team to find out more.

It’s better to take the time to make sure you are signed up to a scheme that you can afford and that is right for your finances in the long run. Once you are signed up to a credit agreement, you’ll have to keep up with the repayments or face additional costs in late fees and interest.

Why was my buy now, pay later application rejected?

Buy now, pay later schemes don’t approve all of their applications, so there could be many reasons why yours was unsuccessful.

Some providers may carry out a credit check when you apply for a buy now, pay later scheme. Lenders are less likely to approve applications from customers with a bad credit history or no credit history. That is because there is a risk that you won’t pay them back, based on your credit records.

Your buy now, pay later application may also be rejected if the provider can’t confirm your identity or address.

Some buy now, pay later applications may be declined if your order is too expensive. Removing items from your basket may help. But only do this if the provider does a soft credit search when you apply, rather than a hard credit search.

Hard credit checks are visible to other lenders. Having too many on your credit report in a short space of time could damage your credit score. That is because it suggests that you are struggling financially and won’t be able to afford repayments.

Buy now, pay later fees and interest

Missing a payment on your buy now, pay later agreement could result in fees and interest being added to your account. The amount of interest charged varies between BNPL providers, so it is worth asking them directly if you can’t find information in the fine print.

These charges can really add up and make your debt more expensive, so it’s important to make sure you can afford to use a buy now, pay later scheme before signing up.

The table below shows how much some of the popular buy now, pay later schemes charge for late payments.

BNPL SchemeLate payment feesAdditional late fees
Klarna
  • A late fee is charged for both ‘pay in 30 days’ and ‘pay in three instalments’ – you may be charged £5 depending on the size and status of the order.
Clearpay
  • £6 fee for each order below £24
  • For orders over £24: a £6 fee, followed by another £6 fee if you haven’t made the payment after seven days. The total late fees you can be charged are 25% of the purchase price or £24, whichever is smaller.
Laybuy
  • £6, followed by another £6 if you haven’t paid within seven days. The maximum you can be charged in fees on each purchase is £24.
Payl8r
  • £15 for missing a scheduled payment

  • £5 for every failed attempt to take payment (three per month)

  • These fees are waived if the account is brought up to date within 28 days of the first charge
  • £25 for an unjustified chargeback claim
    £30 if it prepares to send your account to debt collectors
    £35 if it has to trace you because you haven’t notified them of a change in contact details
    £10 for any payment not made by direct debit or CPA
  • £10 for any payment not made by direct debit or CPA
PayPal Credit/Pay in 3
  • £12 fee for each missed payment on PayPal Credit (no fee for Pay in 3)
Zip
  • £6 for each missed payment (capped at £18)
Zilch
  • £0 but the missed payment may be marked on your credit file, which could harm your credit score. It may also use debt collectors to recover the money 

(All charges correct as of 19 December 2023)

Pros and cons of buy now, pay later schemes

Buy now, pay later schemes offer the following benefits:

  • Free borrowing: In some cases, carefully managing your buy now, pay later repayments could help you borrow money for shopping without paying interest.
  • Flexibility:You don’t have to cover the cost of your shopping up front and can split the bill into monthly instalments or pay the entire lump sum at a later date.
  • Try before you buy:Buy now, pay later schemes offer something of a virtual changing room that allows you to try items before you pay for them, as you would do in a physical shop.
  • Improve credit score:Keeping up with your buy now, pay later repayments can improve your credit score because it shows lenders that you are good at managing money and can afford to repay your debts.

It’s important to consider the following dangers of buy now, pay later schemes before signing up:

  • Impulse shopping: Knowing that you can delay or split repayments could lead to overspending or impulse buying.
  • Late fees: Many buy now, pay later providers charge fees if you miss your payment deadline.
  • Credit score damage: Your credit score could be negatively affected if you miss your buy now, pay later repayments. This could limit your chances of being accepted for new credit in the future.
  • High interest rates: Buy now, pay later schemes that allow you to spread the cost of your shopping over longer periods tend to charge high levels of interest on repayments.
  • Unregulated: Unlike loans and other forms of credit, buy now, pay later schemes are not currently regulated by the FCA and may not run affordability checks to make sure you can afford to borrow money for your shop. The government has plans to regulate some forms of BNPL in the future, but the date is yet to be confirmed.

Where to get help with debt

Buy now, pay later schemes are a type of borrowing, and missing your repayments could get you into debt. If you’re struggling with debt, you can get free debt help from debt charities such as:

  • StepChange
  • Citizens Advice
  • National Debtline

These charities can also help you apply for debt respite schemes such as the ‘Breathing Space’ scheme in England and Wales, and the Debt Arrangement scheme in Scotland. Northern Ireland doesn’t currently offer an equivalent scheme.

Image source: Getty Images

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