How Does Buy Now, Pay Later Work?

How Does Buy Now, Pay Later Work?

If you’re unfamiliar with how Buy Now, Pay Later (BNPL) works, then this piece will help you.  Buy Now, Pay Later is a relatively new method of obtaining very short-term credit for online purchases.  It works by allowing buyers on e-commerce websites to purchase something and pay it off in instalments, usually 3 or 4 instalments often over a few weeks or months.  Most Buy Now, Pay Later products don’t add interest, but some do.

Examples of Buy Now, Pay Later Products

Examples of Buy Now, Pay Later products include ClearPay,  Klarna, SplitIt, PayPal’s Pay In Four and others.  Buy Now, Pay Later products are offered to buyers to checkout – not all online e-commerce sites offer this type of payment, but it’s becoming much more popular and widely accepted.  It’s fair to say that in time, most merchants will offer it.

Isn’t It The Same as A Credit Card?

Yes and no.  It is still a form of loan and it can build debt if you aren’t careful with your spending.  The difference is that there’s no long-term contract, many Buy Now, Pay Later products don’t incur interest (and if so, it’s very small) and the payment is paid off in instalments over a short period of time – plus, payments are taken instantly on a specified date from your credit or debit card.

How Does It Work?

If you hop onto a website and want to make a purchase, for argument’s sake, let’s say it’s a new dishwasher (but it can pretty much be any product) you can choose to pay the whole amount straight away using your credit or debit card. You might choose to use Pay by Bank via Open Banking, where the transaction occurs by instantly transferring funds from your bank account to the merchant, without keying in your card details – or you might choose to Buy Now, Pay Later if it’s offered at checkout.

If you select Buy Now, Pay Later, you’ll be directed to the merchant’s partner (for example, Klarna, ClearPay, SplitIt etc.) and you’ll be offered a series of instalments, often 3 or 4 instalments that you pay for in weeks or months.  You choose the instalment plan you want and fill in a brief application form. Next, the Buy Now, Pay Later product performs a very soft credit check (it doesn’t harm your credit score).  Once approved you’re directed back to the checkout page, and you pay the first instalment immediately.

Your next instalment may be in two weeks or a month, depending on your plan.  You’ll receive a reminder text and/or email just before the next amount is due and then the amount is taken automatically until the full amount is paid off.

In the dishwasher case, if it costs £500 and you choose BNPL to pay for it in a series of three instalments, the first instalment of £166.66 will be taken immediately and the remaining two will be taken at monthly (or weekly – depending on what you’ve agreed) intervals.

In Summary

Buy now, Pay Later is useful for some buyers on e-commerce stores, but it is still a loan and therefore can build debt.  If you choose to use Buy Now, Pay Later, be aware that it could eventually harm your credit score if you pay late or miss a payment.  Without doubt, BNPL has its place in today’s digital world, but as with any form of credit it must be approached with caution.