BNPL Meaning: Explanation and Guide
BNPL is the acronym for Buy Now, Pay Later. Buy now, pay later services allow users to pay for certain purchases in instalments, rather than a single upfront payment. The use of BNPL services has exploded over the past few years and they are only becoming more widely-used; in fact, about a quarter of Brits have now used a buy now, pay later service for online purchases.
But as BNPL services become more accessible, there are major concerns regarding the use of these schemes. If you’re just learning about buy now, pay later services, you might have questions about how these schemes work, what the risks are, and how they can impact your credit. In this blog, we’ll answer each of these questions—so let’s get right to it.
How BNPL Schemes Work
BNPL schemes aren’t a new concept; they’ve existed as catalogues for decades. However, with the increasing popularity of online shopping and digital marketplaces, BNPL providers have found a new home online.
BNPL allows customers to make a purchase and acquire the goods immediately, spreading their payment out over a number of instalments rather than making a single upfront payment. However, it’s important to note that this doesn’t actually change the price of an item; it just breaks the payments down into smaller parts.
Popular buy now, pay later providers such as Klarna and Laybuy offer several different repayment terms. Typically, customers can choose between paying within 30 days, or making a series of weekly, bi-weekly, or monthly payments depending on the service. Some BNPL schemes offer financing for larger purchases, which have different eligibility requirements, payment timelines, and more.
Risks of Buy Now, Pay Later Schemes
At a glance, BNPL services can seem like a great way to get the things you want and deal with the cost later. However, the risks might not always outweigh the reward. Consumer advocacy groups have raised concerns about the potential pitfalls users need to be aware of before signing up for any buy now, pay later scheme.
BNPL Can Encourage Unnecessary Spending
As we hinted above, BNPL services don’t actually change the price of an item. However, by enticing customers with payments as small as £10, they can make items appear more affordable than they really are. The result is that many customers spend more than they intend to when buy now, pay later is available.
Too many unnecessary purchases can quickly eat up your entire monthly budget. This can result in a negative impact on your ability to manage unexpected expenses without missing payments.
Buy Now, Pay Later Lacks Regulation That Protects Consumers
Section 75 of the Consumer Credit Act provides consumers with protections when paying with a credit card. For example, if you make a purchase but it never arrives, is faulty, or the company you bought it from goes out of business, the credit card company is legally required to refund your purchase.
However, when you use a BNPL scheme, your credit card company could make the case that they don’t need to refund the money because it was paid to the BNPL service rather than directly to the supplier. In this instance, Section 75 of the CCA wouldn’t protect you, and you could be left without recourse for getting your money back.
Late Payments Could Still Damage Your Credit Score
Despite BNPL providers such as Klarna advertising no late fees, late payments could still damage your credit score. And while BNPL companies might not issue late fees, they are still able to employ a debt collection agency to collect your outstanding debts, which could have serious implications for your credit file.
Late payments through services such as Laybuy may already impact your credit score the same way a late credit card payment would. Additionally, Klarna has announced that payment data will be shared with TransUnion and Experian starting the 1st of June, 2022, so late payments will have an immediate impact on your credit score in the near future.
Can You Build Credit with BNPL Schemes?
Building credit while using buy now, pay later services is no easy feat, and is largely impacted by the service a customer uses.
Currently, Klarna doesn’t report payments to credit reference agencies, so timely payments won’t help to build your score like they would elsewhere. However, as we mentioned, this may change from the 1st of June 2022. Laybuy, on the other hand, currently shares its payment data with Experian. Additionally, TransUnion announced in February that BNPL data will begin to appear in its credit reports beginning in summer 2022.
It’s uncertain whether timely BNPL payments will benefit credit scores and reports the same way payments for traditional credit cards do. However, missed or late BNPL payments will continue to have a negative effect on consumers’ credit scores. The BNPL landscape is changing quickly, so be sure to check back with the Pave blog to stay up to date.
Pave Can Help You Build Credit the Right Way
The promise of BNPL as a solution to consumer credit challenges hasn’t been realised yet. The best way to build credit is still through the tried-and-true methods that focus on timely payments, using credit in a thoughtful and calculated way, and building fundamental financial habits. And that’s why we designed the Pave App.
Through active credit building, personalised credit fixes, and bills monitoring, Pave helps make sure that you never miss a payment, and that the membership payments you do make are being shared with credit reference agencies to boost your credit score.
Related Read: Beginner’s Guide to Building Credit the Right Way
Related read: The Top Credit Builder Tools for 2022