With the cost of living crisis tightening belts across the nation, buy now pay later schemes offering short-term credit options are increasing in popularity.
While they appear to be convenient and continual ad campaigns have kept them firmly in our minds, buy now pay later options can seem like the quickest and easiest way to pay for things.
It is important to remember that buy now pay later schemes are a type of credit and not a substitute for long-term borrowing or coping with the cost of living.
Here, we explore how buy now pay later firms work, the potential problems with using them, and how Fair for You could be the alternative you’re looking for…
What is buy now pay later?
Buy now pay later offers buyers the chance to spread the cost of online shopping across a set amount of time.
As buy now pay later agreements typically last for less than 12 months, they are not currently regulated by the Financial Conduct Authority (FCA). This means that consumers won’t get the same level of protection if something goes wrong.
Which companies offer buy now pay later options?
Several credit companies offer buy now pay later options when online shopping, including:
ClearPay
Flava
Klarna
Laybuy
Openpay
PayPal
Zilch
In addition to this, some banks are now offering their own buy now pay later options, such as:
HSBC
Monzo
Natwest
Virgin Money
Explore what it means to be regulated by the Financial Conduct Authority in our blog.
How does buy now pay later work?
As opposed to applying for credit in a more formal way, buy now pay later options often present themselves during the checkout process of online shopping.
One of the appealing elements of these schemes is that if you stick to your repayment schedule, you may not have to pay interest or additional fees with buy now pay later options.
Another thing that attracts people to buy now pay later agreements is the ease of use. The majority of buy now pay later lenders also only undertake ‘soft’ credit checks.
What is a soft credit check?
A soft credit check refers to when a lender checks to see if you’re eligible for certain types of credit or interest rates. Companies will perform soft checks to decide whether a credit application would be successful without conducting a more in-depth or ‘hard’ credit check.
A soft credit check has several benefits for customers, particularly that it doesn’t affect your credit score or history, as it doesn’t appear on your credit report.
Essentially, it’s a non-intrusive way for companies to gauge creditworthiness without affecting your credit standing.
What are the problems with buy now pay later?
Despite how convenient it may appear, there are problems that may arise from using buy now pay later schemes.
To highlight and respond to the risks posed by using buy now pay later firms, the Government has announced plans to regulate buy now pay later firms; set to come in mid-2023.
Things to consider before using buy now pay later
If you stick to your repayment instalments, buy now pay later schemes can be useful ways of spreading the cost of your shopping.
This being said, you should consider these four things before signing up for an agreement:
- Read the terms and conditions
As buy now pay later companies are not regulated by the FCA, they are not required to follow the same strict rules as other lenders - this could mean you’re signing up for something that doesn’t properly suit your needs.
Ensuring you pay close attention to the terms around late fees and interest will give you a true reflection of how much it’ll cost if you miss a payment. How you’ll repay the instalments
Buy now pay later is commonly offered at the checkout when you’re buying something online. While these services may be quick and easy to use, an over-reliance on these services can mean repayments build up fast.
Before signing up for a buy now pay later agreement, consider whether you need to split the payments and review other plans you have in place.You may be approved for buy now pay later credit even if you can’t afford it
As noted by Which?, buy now pay later providers don’t have to run affordability checks on customers, so you could end up taking on more debt than you can afford.
While this may seem like a positive, especially if you’ve been turned down for credit before, affordability checks are there to protect you and ensure you only borrow what you can pay back.Your consumer rights are not as protected as with other lenders
As we have mentioned, buy now pay later lenders are not regulated by the FCA. This means that if something goes wrong, you won’t be able to complain to the Financial Ombudsman Service.
Using buy now pay later services also means you’re unable to ask for a refund under Section 75 of the Consumer Credit Act. Section 75 allows people to raise a claim against their credit provider if…
They have paid for some or all of the cost by credit card or with a point-of-sale loan
The cash price of the goods or services is more than £100 or less than £30,000.
You won’t be able to claim under the Section 75 Regulation when you use a buy now pay later agreement because the payment is made by the buy now pay later provider.
Will buy now pay later affect my credit score?
In short, whether buy now pay later agreements will or won’t affect your credit score will depend on the company you sign-up to.
Using some companies, like Laybuy and Openpay will leave a trace on your credit report, so any late payments will be noted.
Similarly, if you continually miss any repayments, some providers will refer you to a debt collection agency, and this could affect future credit applications too.
How does Fair for You differ from a buy now pay later firm?
Despite similarities in how some of our products are designed, e.g. our Food Club Card, Fair for You is not a buy now pay later firm. Here are five ways we’re different from a buy now pay later firm:
We’re regulated by the Financial Conduct Authority, so anyone who takes out a loan with us is covered and can complain to the Financial Ombudsman Service if they have a grievance.
We’re a community interest company, so we don’t operate to make a profit for shareholders or anyone else. Every penny we make is put back into the company and helps our customers access fair and affordable credit. Discover how our community interest company works in our blog.
Our payments are flexible - you choose how and when you’ll repay your loan. If you need to change your repayment plan, you can do that too (just speak to us beforehand).
We’ll be honest about the type of loan that will be best for you and your situation. We work to understand your needs to ensure you’ll be able to afford what you borrow.
We perform credit searches when you submit a loan application to ensure you can pay back what you owe and that you’re not left in a mess. We also have an eligibility checker, which won’t leave a footprint on your credit file, but will give you an indication of whether you might be eligible for a loan.
For money-saving tips and more, explore the Fair for You blog. With information on the difference between responsible and irresponsible lending and everything you need to know about our Iceland Food Club Card Loan, our blog is designed to help our customers and shed light on how we operate. Helping you to remain financially responsible and offering peace of mind that Fair for You is on your side.
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