Is buy now, pay later a safe way to spread costs?

More Britons are relying on credit amid the cost-of-living crisis but Gen Z (aged between 11 and 26) and Millennials (27 to 42) are four times more likely to take on debt this year to meet rising costs.

Research from credit broker Credit Karma has found there is a generational divide in how Britons obtain credit, with younger borrowers more likely to use overdrafts or buy now, pay later options while baby boomers (age 59 to 68) overwhelmingly rely on credit cards.

Buy now, pay later is a relatively recent borrowing method that allows you to make a purchase via a loan provided by a third party. It is commonly available when shopping online and popular providers include Klarna, Clearpay and Afterpay. 

Buy-now, pay later can be a useful budgeting tool if used correctly 

You pay off the loan either in several equal payments, or pay the full amount in one go after a fixed period. Often the loan is interest-free for an initial period.

As with any borrowing, using BNPL comes with risks. Unlike applying for a personal loan or credit card BNPL providers often do not run a credit check on customers, meaning vulnerable users and those with a bad credit history could find themselves saddled with even greater debt.

This is especially true for those without a regular income who may find themselves unable to pay off the loan, exposing them to high interest payments.

Young people are also more likely to struggle with keeping on top of instalments as 11 per cent of Gen Z and 10 per cent of Millennials admit to falling behind on repayments.

Akansha Nath, head of partnerships at Credit Karma UK said: ‘While our new research shows that young people are unfortunately feeling the effects of this financial pressure more than any other age group, there are a number of steps that all borrowers can take to put themselves in a better long-term position.

‘Shopping around for competitive rates, paying as much of your balance off as you can afford to each month, and ensuring your credit score is as strong as it can be, can ultimately reduce the interest you end up owing over the long term.’

So is buy now, pay later ever a good option for managing your outgoings, and what can borrowers do to make sure they stay in control? 

Are there benefits to using buy now, pay later?

Making large one-off purchases such as a holiday or piece of furniture can be daunting and in some cases simply not manageable with a fixed monthly income.

Using BNPL can split the cost into multiple manageable payments usually made over a period of three months. 

This is similar to the way that someone might use a credit card with an interest-free period to split the cost of a big purchase, although the credit check requirements for using BNPL are usually less strict and there aren’t minimum payments to make.

BNPL customers should familiarise themselves with the terms of their borrowing to ensure they have a plan for repayment

In theory, BNPL could be a valuable budgeting tool if you know when the payments are coming up and can ensure you have the money in place to cover them without impacting any essential spending.

At the same time most major BNPL providers including Klarna and Clearpay – the biggest in the UK – do not charge interest and are fee-free if you stick to the repayment plan, so it shouldn’t cost you to borrow. 

The lenders make their money by taking a cut of the price you pay for your purchase. 

Most providers do charge fees if you don’t stick to the repayment schedule, so it is worth checking your agreement before signing up and making sure you have a clear plan to meet the payments.

Noah Maury, is 23 and lives in East London has been using Klarna since he was at university in Lincoln. ‘I use them two or three times every two to three months,’ he told This is Money, when he spends around £100 using the providers.

‘It varies on if there is a special event, a friend’s birthday – a planned event. I use it in summer more.’

He says it is not only him – all his friends in the city use BNPL to help manage cash flow. However, he accepts there are risks.

‘It is out of sight out of mind until you make the payment and I think it can become quite dangerous if you don’t use it correctly and don’t have the funds.’ 

While Noah has been fine, he has friends who have struggled to make the repayments for larger purchases.

What are the red flags to look out for when using BNPL?

The first dangerous habit to look out for is using BNPL to pay for everyday goods, such as the weekly shop, says Simon Dukes, chief executive of Fair for You, a not-for-profit credit provider.

‘The customer must understand that they can take out more and more, and they have to exercise some self-control and awareness about it because they aren’t going to get that from the loan provider,’ he says.

At Fair for You the lender offers a food club which loans people money in the form of vouchers to spend at Iceland, but it has been created so borrowers cannot rely on it. 

You can only use it a maximum of six times a year – predominantly during school holidays – and new loans are only approved once you have paid off the last. These are the sort of safeguards that BNPL will not offer, says Dukes. 

Losing track of how much you owe to BNPL providers or the dates payment is due can also be a warning sign to reduce your spending this way.

‘Know what the payment dates are,’ says Dukes. ‘If they are all coming out at once that may be more helpful for budgeting, but if they are staggered that may be more helpful for cashflow,’ says Dukes.

‘I think it’s like any financial product, that if you do use it sensibly and are aware of the risks that’s what it is there for.’