Buy now pay later – five risks to keep in mind

What do Deliveroo and ASOS have in common? It’s not only that you can continuously scroll yet still not find what you are looking for. Both also offer you the option to “buy now, pay later” or “shop now, pay later” (often known as ‘BNPL’, or BNPL finance).

A number of these companies have become household names in recent years, offering easy access to credit at a retailer’s online checkout, so you get the chance to either delay the full payment (typically for 30 days) or split the amount over weeks or months. Doing so has become very popular, with many consumers now using these services, and the idea isn’t necessarily a new one – it can be compared to store cards or catalogue credit in the past.

Used responsibly, BNPL can be a great way of delaying paying for your purchase or splitting the cost into smaller parts. For example, you may need to spread the cost of something expensive like a new TV over several months, or to make an essential purchase like a birthday present before payday.

However, whether you are delaying or splitting payment for the things in your shopping basket, can this convenience come at a cost? Here are five BNPL risks* to keep in mind.

1. Will you end up spending (a lot) more? 

*Research shows that we tend to spend more when using buy now pay later methods. You might be surprised that in fact some studies show customers spend up to 20-30 percent more when buying through these options – have you thought about how easy it is to spend more than you meant to or can reasonably afford?

2. Will there be an effect on next month’s spending and budget?

Delaying payment can naturally affect how much you’ll have available for future spending and purchases. Will you be able to afford it comfortably, when you do have to make a payment? Completing a budget is a great way of getting control of your finances and understanding how much wriggle room you’ll have for those additional purchases.

3. Will the purchase affect your credit file?

Whilst the majority of BNPL arrangements do not leave a mark on your credit history, remember that if you do miss a payment then it may be reported to credit companies. This can affect your credit file and your creditworthiness and financial plans in the future.

4. Have you thought about ‘late’ fees?

No BNPL companies were created equal. They can differ not only on how the payment is spread out (for example, every two weeks or over two months) but also on late fees. Late charges vary across providers but a £6 initial fee can be applied before potentially increasing to anything up to 25% of the purchase price. You could get a nasty surprise...

5. Are you unwittingly giving up valuable consumer rights?

The final risk is less well known, but can be very important: when using BNPL, it is likely that you’ll be giving up a key consumer right, known as ‘Section 75’. What this rule means, in practice, is that you get a kind of legal protection if you use a credit card to pay for your purchase. When purchasing an item between the price of £100 or £30,000 directly from a retailer, the credit card company is jointly liable for the delivery of the item or service, so you may be able to claim your money back if your purchase is damaged, faulty or cancelled, or if the retailer goes out of business. If you use BNPL, you won’t get this protection.

In summary, when you are ordering a chicken tikka or a pair of jeans, just be sure that it fits in your long-term budget and consider the above.

*Research from RBC