Buy Now, Pay Later (BNPL) has become a popular way to borrow small amounts of money for a short period. Its success has been driven by just how easy it is to use.
Brands such as Klarna, Clearpay and Laybuy are now common options at the checkout on many shopping websites, and even in store too. But if you’ve got a choice, which should you choose and what should you watch out for?
Our guide below covers:
What is Buy Now, Pay Later?
Buy Now, Pay Later, as the name suggests, is a way to spread the cost of your shopping. Buying something today, but paying for it over the following weeks or months.
It’s popular because if you opt for short-term agreements of up to two months, BNPL is usually entirely free of interest or fees.
The BNPL firms make money by taking a commission from the retailer. This means they don’t need to charge anything to customers.
The way BNPL works means it doesn’t count as a regular credit agreement in the eyes of the law. As a result, the sector is currently unregulated. However, the government has announced plans to introduce regulation, which should come into force in 2023.
As things stand, there is no requirement for BNPL lenders to carry out credit checks on their borrowers, and many don’t. This means that they may not appear on your credit file or affect your credit score.
However, some lenders, such as Laybuy, do carry out “hard” credit checks. And these do leave a “footprint” on your file and could affect your score, and ability to be accepted for a loan, if you are shown to have made a number of credit applications in a short space of time.
Bear in mind that without a full assessment of their ability to afford a loan, BNPL borrowers could be at risk of taking on debts that they won’t be able to clear on time.
And if you miss an instalment with Clearpay or Laybuy, for example, there is a late fee of £6 to pay.
It’s likely that once the sector is regulated, all BNPL providers will have to carry out credit checks.
Read our guide here on whether it’s worth taking out a loan to rebuild your credit history.
Who are the best BNPL companies?
Each company has slight differences in how repayments work.
For example, Klarna – the largest BNPL provider – offers the option to either:
- Pay the whole amount 30 days after purchase
- Settle up in three instalments that are taken on the day you make the purchase and then at 30 and 60 days later
In contrast, Laybuy allows you to pay in six instalments. The first is taken on the day of purchase, and the remaining five taken weekly.
Below, we round up the top BNPL providers.
Best for: Customer service and longest free repayment period
Klarna topped our latest customer happiness poll – carried out by the independent research firm Fairer Finance – achieving a score of 69%.
Its slick customer service is popular with borrowers. And it remains one of a handful of providers to promise no late-repayment fees, as well as no interest.
Klarna offers two main products: “Pay in 3” and “Pay in 30”.
- Pay in 3: Allows you to split your purchase into three instalments, with the first due on the day of the transaction and the second and third due 30 and 60 days later. This is about as long as you’ll get from a free BNPL provider, although PayPal also offers 60 days on its Pay in 3 product.
- Pay in 30: Lets you pay the whole sum 30 days after purchase.
Klarna is also launching a new card, which can be used in any store.
Most trusted BNPL provider
New Zealand firm Laybuy won the title of Most Trusted brand in our latest Fairer Finance customer poll, and was only just behind rivals Klarna and Clearpay in the customer-satisfaction stakes.
Unlike Klarna, it does levy charges if you miss a payment. But it’s a fee of just £6, and the fees are capped at £24. So you won’t be charged more than four late fees for any one loan.
Laybuy’s service offers the ability to pay for your purchases in six weekly instalments, the first taken on the day of purchase.
When you apply, you will be subject to a hard credit check. This could have an impact on your credit score.
Best for: Vet fees and dental bills
Openpay is an Australian firm, and it currently only offers loans for vet and dental bills in the UK.
The length of the interest-free period depends on who you’re buying from.
It charges a fee of £7.50 if you miss a payment (up to a maximum of £15).
With living costs rising due to rising inflation, watch the video below for our top budgeting tips.
Is Buy Now, Pay Later safe?
Even though BNPL is not regulated, the main companies in the market are large, respected firms that are already preparing for a regulated world.
However, BNPL does not offer the same consumer protections as credit cards, the other popular form of short-term credit.
If you make a purchase of between £100 and £30,000 on a credit card, you will have what is known as Section 75 protection. This means the credit card company is equally responsible with the company you bought the product or service from if something goes wrong.
A similar scheme, known as chargeback, can be used for debit card payments. But you may not be able to make a successful Section 75 or a chargeback claim if you pay using BNPL.
As long as BNPL is not regulated, it may also be that you are not able to escalate your complaint to the Financial Ombudsman Service. Find out more here about the difference between credit cards and buy now, pay later.
Some of the large BNPL providers, such as Klarna, have voluntarily signed up to the ombudsman’s jurisdiction.
But for those that haven’t, it may be hard to get a complaint resolved independently without heading to the courts.
Finally, it’s worth remembering that BNPL is a credit agreement. And while it is all too easy to be accepted for these and to set one up, it’s important that you are confident of your ability to repay.
What are the advantages of BNPL?
As well as often being free, BNPL is popular with many customers because they can try online purchases before they buy.
Some BNPL providers don’t make you pay anything upfront. This allows you to receive your order before you have paid a penny.
That gives you time to try on a new item of clothing and send it back if necessary, without having the money leave your bank.
Another reason BNPL is popular is that it does not come with the commitment and temptation that a credit card or overdraft might.
Once your purchase is paid back, the agreement is closed and you do not have any long-term agreements to tie you down.
Are there any fees or charges?
Most BNPL providers charge no interest, and only levy fees if you miss a payment. However, some – such as Klarna, PayPal and Zilch – don’t charge any fees even if you miss or are late making a payment.
Nevertheless, this doesn’t mean there are no consequences. Most firms will start off fairly gently, sending reminders by email and text.
But if you continue to fail to make your payments, you could end up being referred to a debt-collection agency. And it could also be reported to the credit-reference agencies.
It’s worth noting that many of the firms in the BNPL sector do offer longer-term credit agreements. These are regulated and come with interest and fees just like regular personal loans and overdrafts.
For example, if you want to buy a bike from Halfords, Klarna’s “Financing” product offers the option to pay in instalments over up to four years – at a fairly high interest rate of 18.9% APR. This will appear on your credit file like any other loan or credit card.
About our ratings
Independent research firm Fairer Finance polled 10,000 UK consumers in the spring of 2022. Those who had used Buy Now, Pay Later were asked which company they had borrowed from and how happy they were with the service, as well as how much they trusted the brand.