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

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 a retailer for goods or services in full when at the till or online checkout, the BNPL provider pays the retailer for you. You then repay the BNPL provider over a few weeks or months, meaning you can spread the cost of your shopping.

This DOESN'T mean what you're buying is any cheaper. Rather, you've simply got more time to pay it off, which can help with cash flow.

The main players in the BNPL market are Klarna, Clearpay and Zilch. In addition, PayPal has a 'Pay in 3' product, while major bank Monzo is also part of the market. Klarna alone has about 18 million UK customers, and works with more than 30,000 retailers.

Some retailers work exclusively with one BNPL provider, meaning there might be limited choice about which to use depending on where you shop.

It's interest and fee-free – so managed correctly, it shouldn't cost you a penny to use BNPL

One of the main draws of BNPL is that it can be completely free for you to use. Neither Klarna nor Clearpay charge any interest or fees for using their services. And while most providers do charge late repayment fees, if you never miss a repayment then using BNPL shouldn't ever cost you a penny.

While the idea of spreading your costs for free over a number of weeks might seem handy, make sure you've always got a plan in place for repaying what you owe. Never be encouraged to overspend. Even if you can spread your costs via BNPL, you'll need the money to repay eventually, even if that's not in full at the point of purchase.

How do BNPL providers make money if they don't charge interest or usage fees? 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.

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

The most common form of BNPL – and the one we're focusing on in this guide – lets you spread your shopping costs over a short period, typically a number of weeks. But exactly how far you can spread your costs and the frequency of repayments will depend on which BNPL provider you use – by signing up to a certain BNPL provider, you agree to its repayment terms and conditions.

After purchasing an item via BNPL, repayments should automatically be taken from your chosen card or account by the provider at set dates (a bit like a standing order), so you won't need to remind yourself to manually make a payment. Usually, BNPL providers remind you a payment's due a few days before so you can ensure you have enough in the account to cover it. 

With Klarna, you pay in three instalments, the first being charged at purchase, the second after 30 days and third after 60 days. It also has the option of paying nothing at purchase and 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, 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 and have up to 30 days to clear the entire £120 balance.

Normally providers will allow you to pay your instalments or clear your outstanding balance early. Here's a breakdown of how the main providers split your payments:

BNPL can be used in store as well as online

BNPL used to be the preserve of online shopping, but these days it's widely available in-store too.

If you're signed up to Klarna, and the store you're shopping in is too, you'll be able to use it. You'll need to provide either your email address, phone number or scan a QR code, after which you'll receive a prompt from Klarna asking to confirm your payment details – once this is done you'll be able to finalise the purchase.

It's not just clothing lines where BNPL can be used. It's available in a variety of other sectors too, including gardening, homeware, toys and much more. There's even a BNPL grocery shop. The spread of retailers that are signed up include the likes of Asos, Halfords, Clas Ohlson, Adidas, Marks & Spencer and Anthropologie.

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. Credit limits tend to differ between users. Some providers may set you a smaller spending limit if you're a new customer, which can increase over time, depending on whether you miss payments. The likelihood though is that your credit limit will be somewhere in the £100s.

Yet your credit limit is per BNPL provider, not across all providers. None of them know how much you're borrowing elsewhere, meaning total debts across several providers can build up. So the burden falls on you to be disciplined with these products – DON'T let yourself overspend if you know you'll struggle to repay what you borrow.

The Government has announced plans to regulate the sector – which should include requiring BNPL firms to run affordability checks on shoppers, something that could impact your credit limit – but this isn't due to come into force until 2026. 

You're unlikely to undergo a 'hard' credit check when using BNPL

When applying for BNPL you're unlikely to be subject to a 'hard' credit check, one that would leave a search mark on your credit file for other lenders to see. 

Instead, you'll probably only have a soft credit check run on you, one that is invisible to other lenders. This could have the knock-on effect that other lenders won't be able to see you've applied for BNPL when making their own decision whether to lend to you or not – in other words, they'll be making a decision without the full picture. 

Yet DON'T BE TEMPTED to think of BNPL as easy money. What you owe is a debt, so make sure you always have a repayment plan in place.

Are you a serial returner? Use BNPL and you don't 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:

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 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.

Using BNPL means LOSING Section 75 consumer protection (but chargeback is still an option)

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 do not currently apply when a 'third-party payment processor' breaks the direct link between a retailer and a credit card company, which sometimes happens when using PayPal. The direct link is also broken when using BNPL to purchase an item. So if you spread the cost of a purchase via Klarna or Clearpay, it's unlikely you'll be able to call on your credit card provider to pursue a Section 75 refund if the item turns up faulty.

Instead, you'll either have to explore what protection your BNPL provider gives you, take up the dispute direct with the retailer, or attempt a chargeback request – though chargeback is not a legal right, unlike Section 75.

While the Government has announced plans to regulate the sector, meaning Section 75 will eventually apply to BNPL agreements in the same way it does for credit card payments, this isn't set to come into force until 2026. 

Miss a payment and you could face late fees

With many BNPL providers, you risk being charged late fees if you miss a repayment – something nearly half of users are unaware of. This can happen, for example, if there aren't enough funds in your account when an instalment is due.

If you continually miss making repayments, these fees could 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. If after seven days you still haven't paid, an additional fee of £6 will be applied. Late fees are capped at either £24 or 25% of the order value, whichever's lower. So for a £40 item, the maximum amount of late fees you could incur is £10.

• Klarna typically charges a late fee of £5. If you miss a payment, you'll have up to 14 days to pay before a late fee is charged. The standard fee is normally £5 or 25% of your order value, whichever's less. You'll only be charged a maximum of two late fees per order, so the maximum fee is £10 per purchase.

• PayPal's 'Pay in 3' doesn't charge late fees. So missing a repayment won't result in a financial penalty.

Missed payments can hurt your credit file too

In the UK, there are three main credit reference agencies: Experian, Equifax and TransUnion. Each holds a dataset on you, known as a credit report, which lists your past 'behaviour', such as repayment history and previous applications for credit. Lenders use these reports to help decide whether or not to let you borrow.

Previously, most BNPL providers didn't report your borrowing to credit reference agencies. But these days many of the big players are doing so. In some cases, such as with Zilch, this reporting impacts your credit score. And there are plans for other firms to introduce this in future, meaning missed or late payments will negatively impact your credit report, while on-time payments will have a positive effect as they'll show you can be trusted with credit.

Because of this changing landscape, it's even more important to pay on time so it doesn't have a negative impact on both your credit report AND score. 

The table shows which BNPL providers currently report to which agencies...

For more information on why having a good credit score is important, see our Improve your credit score guide. Plus, see how to check your credit reports.

You might be able to 'push back' a payment if you need extra time

Where you need extra time to make a repayment, rather than simply missing the payment deadline – which could result in late fees or a negative make on your credit file – check with your provider whether they'll allow extra time to meet the instalment.

Here are the potential options with the main BNPL providers:

• Klarna. You can 'snooze' a repayment by up to 10 days, though this is only allowed once per order. Snoozing has no impact on your credit file and doesn't incur any fees or interest. Hit the 'snooze' button in the Klarna app.

• Clearpay. You can reschedule a payment (or all of them) by up to 21 days at no extra cost and with no impact on your credit file. It's possible to do this three times within a 90-day period, but on the second and third occasions your account will be frozen and you won't be able to make any new purchases via Clearpay until your current repayments are up to date.

• Paypal Pay in 3. You can push back a payment with Pay in 3 by up to one month per order at no extra cost and with no impact on your credit file. But you'll be less likely to be accepted for new spending via Pay in 3 in the short term.

Need more or longer-term support?

Where you're continually finding it a stretch to make repayments, the best thing to do is reach out to your provider directly – the sooner the better (certainly before you miss any repayments). The support available will depend on who your provider is. But bear in mind longer term support is more likely to impact your credit file (for example, other lenders will be able to see you're on a BNPL payment holiday).

Klarna can offer payment holidays of up to six months for those who are really struggling. These are reflected on your credit file. Meanwhile Clearpay offers 'breathing space' of 30 days (no impact on credit file), which'll pause all payments and communication, though you won't be able to make any new purchases.

For more information on what to do if you're struggling with debt, see our Debt help guide or our Mental health & debt booklet.

You can complain if you're unhappy

Where you've got a complaint about an item or service you've bought, in the first instance you should lodge this with the retailer you bought it from. If you're specifically trying to get money back but the retailer isn't playing ball, one of your options is to try the chargeback process. 

Another option is to complain via Resolver, a free-to-use complaints tool. If your dispute remains unresolved, Resolver will then escalate your case to the free Financial Ombudsman Service, which'll hopefully be able to adjudicate.

If your issue is with your BNPL provider specifically, the process of complaining is similar. Either follow the instructions on your provider's website about how to make a complaint directly, or complain via Resolver. However, where a dispute about a BNPL provider remains unresolved, it's less likely this could be escalated to the ombudsman (more on why this is the case below).

BNPL is set to become a regulated sector – meaning MORE consumer protection

The form of BNPL covered in this guide is currently unregulated, meaning users lack vital consumer protection. Yet this is hopefully set to change, as in October 2024 the Government laid down proposals for regulating BNPL (though the proposed rules won't take effect until at least 2026).

Full details in our BNPL regulation news story, but in brief it will mean:

• BNPL providers will have to carry out similar checks to other lenders. When you apply for a credit card or loan, the lender has to carry out stringent affordability checks to ensure you can afford repayments. Lenders are also required to tell you about the product, and let you know what happens if you don't pay.
  
  Once BNPL becomes regulated, providers likely will have to carry out greater affordability checks that are more thorough than what's done currently.

• You'll be able to complain to the ombudsman about BNPL products. Normally if you have a complaint with a lender that can't be resolved, it's possible to escalate your dispute to the free Financial Ombudsman. The ombudsman 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 as the ombudsman can only look into disputes about firms and products that are regulated, if something goes wrong when you're using BNPL, you're unlikely to be able to take your complaint to the ombudsman. Once the sector becomes regulated, you WILL be able to take BNPL complaints to the ombudsman.

• You'll gain valuable Section 75 protection. While BNPL remains unregulated, users do not have access to valuable Section 75 protection, which requires credit card providers to safeguard purchases of £100 and more. You should have recourse to Section 75 on BNPL once the sector becomes regulated.

Monzo's and Barclays' BNPL products work slightly differently

Monzo was the first major bank to join the BNPL market, adding a service called 'Flex' to its current account. Barclays also offers 'Instalments by Barclays', which allows you to buy Amazon goods on credit and pay off the balance gradually over several months.

While both these services let you buy products and pay them off later, they're actually quite different to the other BNPL providers in this guide. For starters, you may have to pay interest – see below for more on when this applies. You're also slightly better protected with Monzo's and Barclay's BNPL products than with the other BNPL providers in this guide as:

• A successful application to use either Monzo Flex or Instalments by Barclays will leave a HARD search on your credit file. So other lenders will be able to see you've applied for credit.

• You CAN complain about either service to the Financial Ombudsman as both Monzo and Barclays are regulated. It's not possible to go to the ombudsman about most other BNPL services as these are not currently regulated.

With both Flex and Instalments by Barclays, your repayments are reported to the credit reference agencies. Assuming you make them on time, this could help boost your credit score, whereas paying late could have an adverse effect on your score.

Monzo Flex – how it works

Monzo Flex doesn't just apply at the checkout when you're making the transaction – you can choose to 'Flex' purchases made in the last 14 days too. If you do, you'll be refunded what you've paid and Monzo will set up a repayment plan. It'll also take the first instalment of your repayments right away.

With Flex, the interest-free option ONLY applies when you opt to make repayments in three instalments over three months on purchases over £100. If you choose to pay over six or 12 months, you'll pay 29% APR interest. You also can't choose to 'Flex' things like bill payments or credit card repayments.

Instalments by Barclays – how it works

When you buy something costing more than £100 on Amazon, you now have the option of spreading the cost using Instalments by Barclays. Depending on the size of your purchase, you're free to repay the balance over as little as three months or as much as 48 months. However, a minimum monthly repayment applies.

Crucially, Barclays charges representative interest of 19.2% APR. So, unless there's a promotional rate when you sign up, you'll end up paying significantly more for the product than if you had paid for it in full upfront. That isn't the case with the interest-free BNPL options mentioned in this guide, provided you make your repayments on time.

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 are currently forfeiting valuable Section 75 protection, which you do get with credit cards. However, your credit limit with a credit card is likely to 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 is higher.

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:

Some BNPL products let you pay over a much longer period

With some BNPL providers it is possible to spread the cost of a payment over many months or even years, rather than just a few weeks. You might even be able to borrow more too.

Klarna, for example, via its 'financing' option, allows you to spread repayments over a period of up six months, and in some cases this can be stretched to 36 months. Another provider, Newpay, lets you spread repayments for up to 48 months.

Yet it's important to note that this is a different version of BNPL to the one covered in this guide. This longer form of BNPL is regulated, which means:

• You undergo more rigorous affordability checks. This means on purchase or application you'll be subject to a 'hard' credit check to ensure you can meet repayments, something that will leave a mark on your credit report. You might also have to sign up to an official credit agreement. 

• You're able to complain to the ombudsman. A bonus of these longer-term BNPL products being regulated is that if you have a complaint that your provider can't resolve, you'll have the option to escalate this complaint to the Financial Ombudsman.

• You might be charged interest – in other words, borrowing isn't necessarily free. This is a major difference to the shorter form of BNPL covered in this guide, where spreading your payments is interest-free.

If you see anything about APRs or repaying over a period longer than two months, then you're probably looking at this regulated form of longer-term BNPL. Before you sign up to one of these products, make sure you consider whether a 0% credit card or 0% overdraft is a better option for you in the first place.

Struggling with debt? Help is available

The cost of living crisis has resulted in lots more people struggling with debt. This includes BNPL debt. If you've debt problems that you're struggling to solve on your own, it's important to know where to 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.