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.

Brean Horne Published on 27 September 2021. Last updated on 12 October 2021.
How Does Buy Now, Pay Later Work?

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.

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.
  • Slice: 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 will 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.

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’s 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.

Using buy now, pay later schemes responsibly can have a positive impact on your credit score though. 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 before signing up.

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

BNPL Scheme Late payment fees Additional late fees
Klarna
  • No late fees with Klarna Pay Later, but your account will automatically go into default, which will damage your credit score. And it may use debt collectors to recover the money.
  • Up to £12 with Klarna Financing for each missed payment
  • £1.49 for each paper statement
  • Cost of sending a letter about outstanding debt
Clearpay
  • £6 fee for each order below £24
  • Up to £36 fee for each order above £24
Laybuy
  • Up to £24 for each missed payment
Payl8r
  • £15 for each missed payment
  • £2.50 for each email of SMS to remind you of late payment
  • £5 for every failed attempt to take payment for the money you owe
  • £10 per call to discuss the late payment
  • £30 if any cheque or direct debit is stopped or cancelled
  • £45 if it prepares to send your account to debt collectors
  • £10 for any payment not made by direct debit
  • Openpay
    • £7.50 missed payment fee
    • Up to £15 fee per plan for payments over 10 days late
    PayPal Credit
    • £6 fee for each missed payment
    AppToPay
    • £12 fee for each missed payment
    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 16 September 2021)

    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 interest 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.

    Image source: Getty Images

    About the author:

    Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more

    If you have any feedback on this article please contact us at [email protected]