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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

Kit Sproson
Kit Sproson | Edited by Ben Slater
Updated 9 August 2023

Millions of people use buy now, pay later firms such as Klarna, Clearpay and Laybuy when shopping online or in store. Managed correctly, buy now, pay later can be a cheap and quick way of accessing credit. But research shows many users aren't aware that if something goes wrong, you face late fees and, increasingly, marks on your credit file. This guide takes you through how buy now, pay later works and what to look out for.

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

While buy now, pay later (BNPL) 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 BNPL wasn't an option?
  2. Am I sure I can meet the repayments?
  3. Is BNPL 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 BNPL at this moment in time.

Important. Buy now, pay later is currently an UNREGULATED sector. Regulation is set to be introduced in the future, but until then BNPL will lack some vital consumer safeguards. This guide talks you through what to be aware of.

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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 a retailer for a good or service 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 Laybuy. In addition, PayPal has a 'Pay in 3' product, while major bank Monzo has also joined 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.

    Some retailers work exclusively with one BNPL provider, meaning there might be limited choice about which to use depending on where you shop. For example, Marks & Spencer works solely with Clearpay.

  2. 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, Clearpay nor Laybuy charge any interest or fees for using their services.

    Most providers do charge late repayment fees, but if you ensure you never miss a payment, 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 like a good one, 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 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 numbers.

  3. 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 the third after 60 days. It also has the option of paying nothing at purchase, then 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:

    When will the payments be taken?

    Provider How many payments? Frequency When is the last payment?
    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

    Note that this table refers to 0% interest repayment BNPL products, not longer-term financing.

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

    BNPL used to be the preserve of online shopping, but increasingly it's 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. In fact, it's available in other sectors as varied as gardening, homeware and toys. 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.

  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. Typically one user's credit limit will differ from the next user.

    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 will know how much you've borrowed elsewhere, meaning total debts across several providers could easily 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.

  6. 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.

  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 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 (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 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, Clearpay or Laybuy, 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.

    Warning. Klarna's 'pay now' service doesn't give Section 75 protection

    Klarna also has a 'pay now' option. This enables you to pay for items or services in full, immediately, when using the credit card you have stored with Klarna – rather than spreading the cost as you normally would with buy now, pay later.

    But beware that even if you do this and pay in full, immediately, you will still lose valuable Section 75 consumer protection, just like you lose it when using buy now, pay later to spread the cost of an item.

    Read more about this pitfall in our 'Beware using Klarna's 'pay now' service' MSE News story.

  9. Miss an instalment 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. This fee can only be charged once for orders under £24, but for orders over £24 it can be charged up to two times, 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 up to four times per purchase with Laybuy. So the maximum late fee per purchase is £24.

    • Klarna is introducing late fees from 16 March 2023. If you miss a payment, you'll have a seven-day grace period to pay before a late fee is charged. The standard fee will be £5 or 25% of your order value, whichever's less. And you'll only be charged a maximum of two late fees per order, so the maximum fee is £10 per purchase. See our news story for more.

    • PayPal's 'Pay in 3' doesn't charge late fees. This has been the case since 2021, so, like Klarna, missing a repayment won't result in a financial penalty.

    • I am going to miss a payment – what help is there?

      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 and see if you can agree a repayment plan.

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

  10. Missed payments can hurt your credit report

    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.

    Until recently, most BNPL providers didn't report your borrowing to credit reference agencies. Yet many of the big players are now doing so. In most cases, this reporting doesn't currently impact your credit score. But there are plans for more 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.

    The one exception is Zilch, which is currently the only BNPL provider where your borrowing behaviour WILL start impacting your credit score from now on – meaning 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...

    Which credit reference agencies does your BNPL provider report to?

    Provider Experian Equifax TransUnion

     

    Klarna (1)


     

    Clearpay


     

    Laybuy (2)


    PayPal – Pay in 3
    Zilch (3)

    (1) Reporting BNPL repayments made on or after 1 June 2022. (2) Reporting BNPL repayments made on or after 1 September 2022. (3) Zilch is currently the only provider where your usage will impact your credit report and score.

    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.

  11. You can complain if you're unhappy

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

    If you don't feel comfortable complaining directly to a retailer, you could do it via Resolver instead, a free-to-use complaints tool. Where your dispute remains unresolved, Resolver will try to escalate it 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 use Resolver, or follow the instructions on your provider's website about how to make a complaint.

    However, where a dispute about a BNPL provider remains unresolved, it's unlikely this could be escalated to the ombudsman, as BNPL is an unregulated sector. More on why and what this means below...

  12. BNPL is 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 thankfully this is set to change – a campaigns WIN for MoneySavingExpert.com and its founder Martin Lewis, among others.

    This is what the Government has indicated new regulation of BNPL will include:

    • 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.

      When 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 where 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 is an independent official that 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. Whilst 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.

    BNPL regulation could be shelved. Plans to give buy now, pay later users much-needed new rights and protections could be scrapped, as a report has emerged that the Government plans to delay the introduction of vital new laws. Full update in our BNPL news story.

  13. 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 has also launched '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 not making them on time 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 a 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 worth between £30 and £3,000. If you choose to pay over six or 12 months, you'll pay 19% 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, you must repay at least £15 each month. 

    Crucially, Barclays charges representative interest of 10.9% 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.

  14. 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:

    BNPL vs 0% credit cards vs 0% overdrafts

    TABLE_CELL_STYLE Buy now, pay later 0% credit card 0% overdraft
    Section 75 protection? Not yet Yes No
    Can I complain to ombudsman? Not yet (1) Yes Yes
    Does it do a hard credit check? No (1) Yes Yes
    Do I get quick access to credit? Yes No No
    How long do I have to repay? Usually up to six weeks Up to 24 months Up to 12 months (2)

    (1) Except with Monzo Flex & Instalments by Barclays. (2) Some lenders also offer overdrafts that are interest-free for an ongoing period. For example, First Direct offers overdrafts where the first £250 overdrawn is interest-free, but charges 39.9% EAR variable above this.

  15. 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 over 24 months, with a credit limit of up to £5,000.

    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.

  16. Struggling with debt? Help is available

    The pandemic and now the cost of living crisis have 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.

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