Buy now, pay later: how it works and what to look out for

Buy now, pay later: how it works and what to look out for

Make sure you check first whether it's the right way to borrow

Millions of people across the UK are now using buy now, pay later firms such as Klarna and Clearpay when shopping online or in store – and recently major bank Monzo also entered this growing market. Managed correctly, buy now, pay later can be a cheap and quick way of accessing credit, but if something goes wrong you face late fees and even marks on your credit file. This guide takes you through how it works.

Three questions to ask yourself before using buy now, pay later

While buy now, pay later can be a cheap way to borrow, it's still a debt. Before you dive in, have a think about how you'd answer these three questions:

  1. Would I have bought this item in the first place if buy now, pay later wasn't an option?
  2. Am I sure I can meet the repayments?
  3. Is buy now, pay later the best form of borrowing out there for me? See Buy now, pay later vs 0% credit cards vs 0% overdrafts for help answering this.

If the answer to any of these questions is 'no', then we'd argue you shouldn't be using buy now, pay later at this moment in time.

Important. Buy now, pay later is currently an UNREGULATED sector (though this is set to change in the near future). If you've decided to use buy now, pay later, make sure you read about what buy now, pay later being unregulated means for you.

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  1. With BNPL you're SPREADING the cost of what you buy over weeks or months

    Buy now, pay later (BNPL) is a simple concept: instead of you paying at the till or online checkout, the BNPL provider pays the retailer for you. You then agree to pay the BNPL provider back over a few weeks or months, meaning you can spread out your shopping costs.

    That DOESN'T mean that what you're buying is any cheaper. It simply means that you've got longer to pay off the full cost, which might help with cash flow.

    The main players in the BNPL market are KlarnaClearpay and Laybuy. More recently, PayPal launched its 'Pay in 3' product, while Monzo became the first major bank to join the market. Klarna alone has about eight million UK customers, and works with more than 6,500 retailers, while Laybuy works with more than 800 retailers.

    Retailers tend to work with particular BNPL providers, meaning you might have limited choice about which to use when it comes to paying. For instance, Marks & Spencer works exclusively with Clearpay. So if you want to pay using BNPL at M&S, you'd have to sign up to Clearpay. 

    Note: Some BNPL providers offer longer-term finance. We explain more about these products later.

  2. It's interest and fee-free. So, managed correctly, it won't cost you a penny to use BNPL

    One of the main draws of BNPL is that it's normally interest and fee-free (unless you don't make your repayments on time). Klarna, Clearpay and Laybuy don't charge interest or fees for using any of their short-term products.

    Managed correctly – for example, by ensuring you never miss a payment, which'll normally incur a fee – BNPL can be used as a totally FREE way to borrow.

    While the idea of spreading your costs over a number of weeks for free might be helpful, make sure that you're still confident of repaying what you owe. Never be encouraged to overspend. Even if you can spread out your costs using BNPL, you'll always need the money to repay, even if that's not immediately at purchase.

    How do BNPL providers make money if they don't charge interest or fees? Well, instead of charging you, BNPL providers make money by taking a cut from anything they help a retailer to sell. One of their main pitches to retailers is that BNPL can significantly increase sales numbers.

  3. BNPL repayments are normally fortnightly or weekly – so have a repayment plan in place

    If you choose to use BNPL when shopping you'll typically repay the cost of what you buy over a number of weeks.

    The exact number of instalments and how often you'll need to pay them will depend on which BNPL provider you use – by agreeing at the checkout to go with a certain BNPL provider, you also agree to its repayment terms and conditions. Repayment instalments should then automatically be taken from your chosen card or account by the BNPL provider, so you won't need to remember to manually make payments on set dates (a bit like a standing order).

    With Klarna, you can pay in three instalments, the first being charged at purchase, the second after 30 days and the third after 60 days. It also has the option of paying nothing at purchase, but clearing the balance in full up to 30 days later. Here's an example...

    If you used Klarna to buy a pair of £120 shoes, for example, you could pay £40 at purchase, another £40 after 30 days and a final £40 after 60 days. OR you could pay nothing at purchase but have up to 30 days to clear the entire £120 balance.

    Normally providers will also allow you to pay off your instalments or balance early.

    Here's a breakdown of how the main providers split your payments:

    When will the payments be taken? (1)
    Provider How many instalments Frequency of instalments When is the last instalment charged?
    Klarna 3 At purchase, then every 30 days 60 days after purchase
    Clearpay 4 At purchase, then every two weeks Six weeks after purchase
    Laybuy 6 At purchase, then weekly Five weeks after purchase
    PayPal – Pay in 3 3 At purchase, then monthly Two months after purchase
    (1) This table refers to 0% interest repayment products, not longer-term financing.
    • With BNPL, any remaining instalments will automatically be taken from your debit or credit account at set dates (agreed at point of purchase).

      You need to ensure that there is enough money in your account when these instalments are due, otherwise you risk being charged a late fee if the instalment can't be taken. 

      So if you're forgetful, or low on funds, note down when your instalments are due, to ensure you have enough available at the time.

      Your BNPL provider should give you prompts before payments are due as well as notifications when money has been successfully taken from your account.

      If you're using a BNPL app, you should get notifications about upcoming payments.

  4. BNPL can be used in store as well as online

    BNPL used to primarily target online shopping, but increasingly it's available in store at high street shops too.

    If you want to use Klarna in store for example, you simply need to ask to pay via Klarna whilst at the checkout (that's provided it's a participating store). You may even be presented with the option to pay via Klarna without needing to ask in the first place, though the exact process will likely vary by store.

    While BNPL is popular with younger generations, it's growing in popularity with people of all ages (Klarna's average user is aged 33).

    And it's not just clothing lines where BNPL can be used either. As mentioned above, Klarna works with more than 6,500 retailers and Laybuy with over 800. You should be able to see on a retailer's website whether using BNPL is an option.

    While BNPL remains mainly an option for clothing retailers, it's branched out to other sectors such as gardening, homeware, toys and statues (yes, we know!). There's even a BNPL grocery shop. The spread of retailers that are signed up includes the likes of Asos, Halfords, Clas Ohlson, Adidas, Marks & Spencer and Anthropologie.

  5. Everyone has a different spending limit, though it's likely to be in the £100s NOT the £1,000s

    Each BNPL provider sets you a credit limit based on your credit rating, affordability and the provider's internal algorithms (normally equivalent to a soft credit check), meaning one customer's credit limit might differ from the next.

    With some providers, they may set you a smaller spending limit if you're a new customer, but this may be increased over time, depending on whether you miss payments. The likelihood is that your credit limit will be somewhere in the £100s though.

    Yet your credit limit is per BNPL provider, not across all providers – and none of them will know how much you've borrowed elsewhere, meaning total debts across several providers could be £1,000+. So you need to be disciplined with these products – DON'T let yourself overspend if you know you'll struggle to repay what you borrow.

    When you apply for BNPL, the lender will check your credit file before approving your application. But it'll only do a soft search, which means no other future lenders will be able to see that you've applied for that credit. If it would have been a hard check, other lenders would be able to see those checks on your file.

    Once the BNPL sector moves under the regulation of the Financial Conduct Authority, this will likely restrict the amount that customers are able to borrow via BNPL, as providers will have to bolster their affordability checks. Currently, lenders only tend to 'soft check' your affordability when taking on new customers or setting your credit limit.

  6. You're unlikely to be 'hard' credit checked when using BNPL – but affordability rules are set to tighten

    Currently when you buy something using BNPL you're unlikely to be subject to a 'hard' credit check – one that would leave a 'footprint' on your credit file that other lenders could see in the future. Typically you'll just have a soft credit check run on you (one that doesn't leave a 'footprint' on your file). This easy-ish access to credit, which can be granted in moments, has made BNPL a popular option with UK shoppers.

    However, it's vital not to think of this as easy money.

    Whatever you borrow you'll NEED to repay. With this form of BNPL currently being unregulated, much of the burden at the moment falls on you to keep the amount you borrow to within sensible limits that you know you can afford to pay off.

    As part of BNPL becoming regulated by the Financial Conduct Authority in the near future, providers will be required to carry out more stringent affordability checks. This will likely impact who can access BNPL, and how much those who use it can borrow.

  7. Are you a serial returner? Use BNPL and you no longer have to wait for refunds to be returned to your bank account

    One particular advantage of BNPL is that you only ever need to pay for what you actually end up keeping, even if that's much less than you put into your shopping basket in the first place.

    This can be really handy if you are clothes shopping, for example. Over to MSE Amalia, who uses Klarna, to explain:

    Let's say you're buying a dress, but are not sure which size fits. You could order a few sizes of the same dress and simply return the ones you don't want – meaning you won't end up paying for them. If you pick Klarna's option to pay in full up to 30 days later, you won't even have the inconvenience of an initial instalment leaving your bank account in the first place if you return the goods on time.

    In general, if you want to return an item that you've bought through BNPL, you'll need to arrange this directly with the retailer and in line with its returns policy, though some BNPL providers can deal with returns via app.

    Until a return has been processed by the retailer, you'll normally still need to pay any instalments due to your BNPL provider, and only when a returns process has completed will your BNPL balance and due upcoming instalments be amended. The exact process varies by provider, so it's important you check what the T&Cs say about returns and refunds.

  8. Using BNPL means LOSING Section 75 consumer protection

    Section 75 laws mean your credit card provider must protect purchases over £100 for free, so if there's a problem, such as faulty or non-delivered goods, you could get your money back. For many people, it's a valuable reassurance when shopping with a credit card knowing you've got Section 75 protection. 

    However, Section 75 rules won't apply where a 'third-party payment processor' breaks the direct link between a retailer and a credit card company, which sometimes happens when using PayPal. This exception also applies when using BNPL to purchase an item.

    So if you use Klarna, Clearpay or Laybuy to buy something – even if you repay the instalments via your credit card – but your goods turn up faulty or don't arrive, it's unlikely you'll be able to call on your credit card provider to pursue a Section 75 refund.

    Instead, you'll either have to explore what protection your BNPL provider gives you (this should be explained in its T&Cs), take up the dispute direct with the retailer, or attempt a chargeback request – although this is not a legal right, unlike Section 75.

  9. Miss an instalment and you'll likely face late fees

    With most BNPL providers you risk being charged late fees if you miss an instalment deadline, for example, if there aren't enough funds in your account.

    In some cases, these fees can eventually dwarf the cost of the product you've bought.

    Here's a look at what some of the main providers charge:

    • Clearpay charges a late fee of £6. This fee can only be charged once for orders under £24, but for orders over £24 you can continually be charged late fees, capped at 25% of the order's cost or £36 (whichever is less). So for a £40 item, the maximum amount of late fees you could incur is £10.

    • Laybuy also charges a late fee of £6. This fee can be charged twice per missed instalment (so £12 per instalment). If you were late in paying three instalments, the maximum amount of late fees you could be charged is £36.

    • Klarna doesn't charge late fees. Klarna brands itself as being 'no fees, no interest ever'. So even if you were continually late in paying off the instalments, you won't rack up late fees.

    • PayPal's 'Pay in 3' charges a late fee of £12. If you're late with a payment, you'll be charged £12. This late fee can be charged a maximum of twice on each transaction, so a total of £24 per transaction. You won't be charged interest on any late fees.
    • If you know you're going to miss a payment, the most important thing to do is get in touch with your BNPL provider in good time.

      Your provider should have a financial hardship policy, so if you're struggling with repayments you should get in touch with customer services and see if you can agree a repayment plan.

      One option with Klarna is to 'snooze' your payment by up to 10 days, though this can only be used once per order. If you're struggling with repayments for more than one order, get in touch with your provider.

      For more information on debt and what help is out there, see our Debt Help guide or our Mental Health & Debt booklet.

      Affected by coronavirus? There is further help out there. If you're struggling to make BNPL repayments because of coronavirus, there are further options available if you need help, including the possibility of payment holidays. For more information on coronavirus-related BNPL help, see our Coronavirus Finance & Bills Help guide.

  10. Any missed payments can hurt your credit score

    If you're making late payments, your credit score could be negatively affected. Most BNPL providers reserve the right to file missed or late payments with credit reference agencies, including PayPal, Clearpay and Laybuy, although they insist this is used as a last resort.

    If your debt is passed on to a debt collection agency, this is also likely to impact your credit score.

    Once BNPL moves under Financial Conduct Authority regulation, it's possible that providers may be more likely to report late or missed payments to credit reference agencies.

    For more information on why having a good credit score is important, see our Credit Scores guide.

  11. Buy now, pay later is to become a regulated sector – meaning MORE consumer protection

    The form of BNPL that we deal with in this guide, where you'll repay what you buy over a short period, typically over weeks, is currently an UNREGULATED industry. This is set to change in the near future though, with BNPL marked to become regulated by the Financial Conduct Authority (FCA) – a campaigns win for and its founder Martin Lewis.

    Here's what BNPL becoming regulated will mean for users:

    • BNPL providers will have to do the same checks as other lenders. When you apply for a credit card or loan, for example, the lender has to follow FCA rules. These require the lender to tell you about the product, and let you know what happens if you don't pay. It also requires the lender to do extensive checks to ensure you can afford repayments.

      Yet BNPL providers aren't regulated in the same way and don't have to do the same stringent checks. When BNPL does become FCA-regulated, providers WILL have to carry out greater affordability checks.
    • You'll be able to complain to the ombudsman about BNPL products. With other lenders, if you have a complaint that they can't resolve (or you don't think their resolution is fair) you can normally escalate the complaint to the Financial Ombudsman for free. The ombudsman is an independent official who can adjudicate on whether the lender's treated you fairly, or whether it should have treated you in a different way, and then force it to put things right.

      However, the Financial Ombudsman can only look into disputes about products and services that are FCA-regulated – so if something goes wrong with your BNPL agreement before BNPL becomes regulated, you're unlikely to be able to take your complaint to the ombudsman. Once BNPL becomes regulated, you WILL be able to take your complaint to the ombudsman.
  12. Monzo's new buy now, pay later product works slightly differently

    Monzo recently became the first major bank to join the buy now, pay later market.

    Similarly to other BNPL providers, Monzo's 'Flex' service allows users to make interest-free repayments on in-store and online transactions. With Flex, the interest-free option applies when you opt to make repayments in three instalments over three months – eligible on purchases worth between £30 and £3,000. However, there are some key differences between Monzo and the other BNPL providers discussed in this guide, including:

    • A successful application to use Monzo Flex will leave a HARD search on your credit file. This means other lenders will be able to see you've applied for credit.

    • You CAN complain about Monzo's Flex service to the Financial Ombudsman as Monzo itself is regulated. It's not possible to go to the ombudsman about most other BNPL services as these are not regulated by the Financial Conduct Authority.

    We've written a news story which has more details on how Monzo's new Flex scheme works.

  13. A 0% credit card or overdraft might be a better way to borrow – compare the pros and cons of all three

    BNPL is a form of credit, so it makes sense to consider whether BNPL or a more traditional form of credit, such as a 0% credit card or 0% overdraft, is better for you.

    The answer will depend on your circumstances, how much credit you need, how easily you'll be able to repay what you owe, and what level of protection you want. For example, with BNPL you will be forfeiting Section 75, a protection that you would otherwise have when using a credit card.

    Section 75 laws mean your credit card provider must protect purchases over £100 for free, so if there's a problem, such as faulty or non-delivered goods, you could get your money back. However, with credit cards your credit limit will normally be higher than what you'd get with BNPL, meaning the temptation to overspend could be greater. Plus, the cost of not repaying your credit card on time can be huge.

    For full help, have a read of our 0% credit cards and 0% overdrafts guides. In the meantime, we've compiled a table below which compares the basics:

    BNPL vs 0% credit cards vs 0% overdrafts

    Section 75 protection? No Yes No
    Can I complain to ombudsman? No (1) Yes Yes
    Hard credit check needed? No (2) Yes Yes
    Quick access to credit? Yes (2) No No
    How long have I got to repay? Typically up to six weeks Up to 20 months Up to 12 months (3)

    (1) Once BNPL becomes FCA-regulated, BNPL users WILL be able to complain to the ombudsman. With Monzo Flex, you ARE already able to complain to the ombudsman as Monzo is regulated.

    (2) Once BNPL becomes FCA-regulated, it's likely that greater affordability checks will be introduced, meaning that access to credit will not be as quick. With Monzo Flex, a successful application WILL result in a hard credit check.

    (3) Some lenders also offer overdrafts that are interest-free for an ongoing period. For example, First Direct and M&S offer overdrafts where the first £250 overdrawn is interest-free, but with rates of 39.9% variable interest charged on anything overdrawn above this.

  14. Some BNPL products let you pay over a much longer period

    Some BNPL providers allow you to repay the cost of an item over months or even years. For instance, Klarna will let you pay for something over six months, or all the way up to over 36 months, with its 'financing' option.

    It's important to remember though that this longer form of BNPL is much different to what's covered in this guide:

    • Longer-term BNPL products are ALREADY regulated. This means you'd be subject to 'hard' credit checks and you'd have to sign up to a proper credit agreement. The lender has to follow FCA rules, which'll required the lender to do extensive checks to ensure you can afford repayments.
    • You can ALREADY complain to the ombudsman about these BNPL products. As these longer-term BNPL products are regulated, if you have a complaint that your provider can't resolve, you'll have the option to take your complaint to the Financial Ombudsman for free.

    If you see anything about APRs or repaying over a period longer than two months, then you're probably looking at the financing, regulated form of BNPL.

    If you do need to access long-term credit, see our Best 0% Credit Cards guide in the first instance.

  15. If you're unhappy then try to complain to your BNPL provider

    If you have an issue with your BNPL provider you should be able to complain directly to the firm. Klarna and Clearpay have instructions on their websites about how to make a complaint, and say they aim to resolve complaints within four weeks.

    Or, rather than going direct, you can also complain about your BNPL provider or a particular retailer via the free complaints tool Resolver. Resolver will handle your complaint and, if possible, escalate your case to the free Financial Ombudsman Service. But as most BNPL products are unregulated, you will likely find that the ombudsman will not be able to take on your complaint.

  16. Struggling with debt? Help is available

    Since the coronavirus pandemic began, lots more people are finding themselves struggling with debt issues, including repayment problems associated with short-term lending – such as BNPL.

    If you've debt problems that you're finding hard to solve on your own, it's important to know where you can get help, before matters hit a crisis point. The best place to start is by talking to a non-profit agency, the main ones being Citizens Advice, StepChange and National Debtline. They'll be able to talk you through your options and offer free and impartial advice.

    Also, take a read of our Debt Problems guide, which includes tips on ways to sort your spending and cut the costs of your debt.

    If you're already on a debt management plan, be sure to check whether using BNPL is permitted under the plan.

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