The “buy now, pay later” option is the preferred choice of millions of UK shoppers both in stores and online. Although in theory, it seems simple, the option of buying now and paying later is a form of borrowing and so it must be well understood to know what you’re dabbling into.
Buying now and paying later pretty much offers shoppers the option of making payment in installments while they take the product home straightaway. But is this a better alternative to staggering the payments from the day you purchase?
The Rising Popularity of BNPL (Buy Now, Pay Later)
The number of installments your cost can be split into and the amount payable on each installment is determined by your choice of BNPL provider. Initially, you have to provide your card details when using a BNPL provider, but subsequently, the payments are deducted automatically.
One major attraction is that there are no fees or interest charges and you won’t be subjected to any hard credit check which could reflect on your credit score.
It is these; the absence of hard credit check and quick access to 0% credit that have made BNPL a popular choice among UK shoppers.
It’s an affordable means of borrowing when well run. That said, with BNPL you are expected to make all outstanding payments quicker (a period not exceeding 6 weeks in most cases), unlike with 0% credit cards whose repayments could span months or years.
Typical Repayments are Weekly or Biweekly
How your repayment is structured depends on which BNPL provider you opt for. In most cases, you’ll make uniform installments over a couple of weeks, after having made the first payment when you check out either online or at the counter.
Klarna offers the option of making the first payment at purchase while the second and third are due after 30 and 60 days have passed. Alternatively, you can pick up the item without making a payment but full payment must be completed no later than 30 days from then.
No signs of BNPL slowing down anytime soon
BNPL shopping options are a big hit in the fashion industry with several buy now pay later clothes websites allowing shoppers to get all of their fashion favorites as quickly as they can find them, as opposed to only when they can afford them – an important feature if you want those items while they’re still trending.
It appears valid to think that fashion outlets are out to attract younger clientele with their enticing BNPL proposition. Their marketing strategies make this hard to deny as companies like Klarna portray the shopping experience on their platform as effortless, safe, and fun.
The Office for National Statistics reports that over 50% of people between the ages of 22 and 29 have no savings and a survey carried out by Compare the Market suggests that the number of adults in the UK who have used a BNPL scheme in the last 12 months are over 10 million.
BNPL Schemes: What Customers should know!
Shoppers need to look past the allure of new products and pay attention to the effects of BNPL proposals on their finances.
The core of these BNPL schemes is simply a temporal loan. The question is: how is a BNPL shopping option different from other kinds of temporal loans?
If you take a close look at a leading brand, Klarna, you can see that they offer customers three payment options for making purchases. While one allows you to spread payment in 3 monthly instalments of the same amount and without interest, the second gives you the option of delaying payment until after 30 days, notifying you well before your due date.
The last option is a bit more complicated, offering an interest-free payment period of 6 to 36 months.
These options look good if the templates and procedures run as intended, without any hiccups making payments before the deadline. This is not the case however as there are several reports of problems arising from customers being unable to make repayments on BNPL schemes for different reasons, creating more challenges.
Under Klarna’s BNPL scheme, terms and conditions establish that a credit check will be pledged at predetermined times based on the product. ‘Pay later’ includes a soft check of your finances (which is invisible to other lenders and doesn’t affect your Credit Rating) while ‘Financing’ will warrant a full credit review.
Klarna has stated that under its ‘Pay later’ and ‘Pay in 3 instalments’ products, customers’ Credit Scores are not affected even if they miss out on payment deadlines neither does it divulge client information to Credit Reference Agencies. It is only Klarna’s ‘Financing’ product that attracts the possibility of being reported to Credit Reference Agencies for missed payment deadlines. Because these schemes are void of interest payments, they pose lesser risk than other credit options.
Spreading the cost with credit
Retailers have often set up credit schemes that differ from that of regular credit providers. We have had store cards for years although their popularity has somewhat dwindled. They are simply credit cards for a single store, group or retail chain like Arcadia for example. They offer certain advantages to attract new sign-ups but charge clients high interest when they default on full repayment.
Store cards are liable to get bad publicity mostly because impulsive customers are drawn to them without much care for the implications on their finances. There’s the issue of high APRs when customers default on payment under 30 days. Also, you have some retailers like Littlewoods who differ from others as they offer credit as their main means of payment for products, allowing them to spread their procurement costs without added interest rates.
BNPL works online AND offline; so why not BNPL?
Initially, BNPL schemes targeted online shopping but today you can access them at your local street shop. Though popular with younger folk, BNPL is growing on other age groups as well, Klarna even puts the average age of its clients at 33.
BNPL isn’t limited to clothing companies too. Earlier mentioned companies like Klarna, and even Laybuy work with over 6,500 and 800 retailers respectively. It’s easy to know if your retailer uses the BNPL payment option by checking their website.
Hence, the offering of credit facilities as a means of payment to drive sales is not a new 2020 trend; it has always been a part of the retailing business. What’s probably new is how quickly BNPL payment options are being accepted in the ever-evolving world of online shopping.
