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What is buy now, pay later?

Buy now, pay later is a scheme which a lot of online stores offer as a way to help you buy the items you need if you are struggling to afford it in one go. But did you know that buy now, pay later is actually a type of loan? And your credit file will be affected accordingly.

Because most loans are advertised as ‘loans’, or at least as a credit product which you’ve heard of so many times you know exactly what it is such as a credit card or an overdraft, when a new term joins the market it can be difficult establishing what exactly it is. Buy now, pay later is effectively a catalogue loan. You make a purchase and then you repay the cost of the item over a few months, rather than making the repayment in one go. It’s a type of loan facility most usually associated with large furniture or white goods such as a fridge or a washing machine – and that’s because these items are expensive but necessary for day to day life.

However, buy now, pay later is advertised as a payment option on more and more sites across the internet and even in some stores, which is why it’s important to remember that if you are relying on these kind of credit products to make common purchases then you may need to re-evaluate your monthly budget.

How does buy now, pay later work?

Buy now, pay later means you can purchase an item even if you don’t have the cash to pay for it right away. You then make payments over the next few weeks or months to repay the amount you borrowed. Most of the time, using buy now pay later means you get the first few months interest free – which is great if you can afford to repay the purchase in that time, but if you can’t, you may suddenly find yourself paying quite a bit back in interest, especially as the purchases you’re likely to use buy now, pay later for are probably quite expensive. Usually, missed payments will also incur additional fees, sometimes up to £12, so it is really important that you make a responsible decision when it comes to using this kind of financial aid.

While buy now, pay later facilities run a credit check before agreeing this payment method, it doesn’t mean you should always make use of it.

What should I use buy now, pay later for?

Being responsible with money doesn’t come easy to everyone but there are things you can do to make sure you are at least trying to practice good money management skills.

Think of using buy now, pay later like having access to a credit card – or even an instalment loan. You will pay interest for borrowing the money you need to make the purchase, so the cost of the product by the end of the loan term is likely to be much more than the original retail price. While this might be the only way you can afford to buy those important purchases, like a sofa or a new oven, it’s good to remember that less fundamental items should probably just wait until payday – or until you’ve saved enough to afford it.

What if I don’t make my repayments on time?

Failing to make your repayments on time, as with any credit or loan product, can cause you serious money problems and make credit harder to obtain in the future. It can also negatively impact your credit file which can affect your access to certain types of credit, particularly if you are looking to apply for a mortgage or finance a car any time soon. Even getting a mobile phone contract requires a credit check, so it’s important not to take out more credit than you can afford to repay.

But what if I need money fast?

There will always be times when you are faced with an urgent bill but are strapped for cash when the payment is due. Sometimes, taking out a loan or requesting a payment arrangement with the service provider is the only way to pay the bill without going into arrears. When you start to think of new credit facilities as a financial commitment, rather than a financial relief, you might find it easier to make more responsible decisions when it comes to money.

Start a monthly budget so that you can keep track of your spending and hopefully save a little towards future expenses and annual bills that you are not always ready for when the invoice date rolls around. If you are looking to purchase new home goods and you don’t have the time to save up for it beforehand, then taking out finance with the supplier may work out to be the cheapest option, but it doesn’t mean you shouldn’t look around and do some comparative research first.

Save buy now, pay later for the items you really need rather than the items you really want. Then when you do finally purchase that little piece of luxury, it will feel all the more rewarding because you have waited and saved up for it.

Managing money is not always easy, but making sensible financial choices is something in your control. After a little work here and there, you should become less reliant on credit facilities and hopefully start building your savings to tackle urgent expenses with money you have earned rather than money you have borrowed.

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