'Buy now, pay later' schemes explained

How buy now, pay later schemes work

Buy now, pay later (BNPL) schemes are a form of short-term credit.

Typically, the schemes allow you to pay for items in instalments or in one repayment at a later date, interest-free.

Repayment plans normally last 12 months or less.

Many of the schemes are unregulated, which means you won't benefit from the same protections you get when paying with a credit card.

How Klarna, Clearpay, Laybuy, Paypal and Zilch compare

Klarna, Laybuy and Clearpay are the three biggest BNPL providers in the UK. 

But the industry is rapidly growing and there are new providers offering different schemes all the time. Many banks now also offer their own regulated BNPL schemes for existing customers.

No two BNPL schemes are the same, so it’s important to double-check how they work before signing up for a new one.

Which? research in 2021 found some retailers offer as many as six BNPL schemes at the checkout, but it’s not always clear how they differ in terms of late fees, credit checks or repayments.

In the table, we look at some of the key differences between the biggest BNPL providers and the main options they provide to retailers.

What’s the difference between buy now, pay later schemes and credit cards?

Though they’re both a form of credit, BNPL schemes work differently from credit cards.

One of the key differences is that you don’t get Section 75 protection when you pay with a BNPL scheme.

Section 75 protection means your bank is jointly liable if anything goes wrong with purchases worth over £100 and up to £30,000 made on your credit card. If you experience a missing delivery or faulty product, for example, you can make a Section 75 claim with your credit card provider and get the money back this way.

As BNPL schemes aren’t covered by Section 75, you should consider using your credit card for larger purchases.

Here are some other key differences between BNPL schemes and 0% credit cards to take into account before deciding which type of credit is best for you.

• Find out more: the best 0% purchase credit cards

Can I use a credit card to pay off buy now, pay later debt?

Most BNPL providers accept credit cards as payment, including Klarna, Laybuy and Clearpay.

Zilch does not accept credit cards and told Which? it believed it was an ‘irresponsible practice that risks compounding the debt problem’.

Paypal’s Pay in 3 also only accepts debit cards.

In response, Klarna said it monitors credit card use closely for signs that it may be being used unwisely. 

Laybuy said around 2% of its UK customers use a credit card for paying off BNPL debts and it carries out credit checks on each customer to make sure it has a 'clear picture' of their credit history. 

Clearpay told us its latest data shows that 90% of transactions are paid with a debit card.

How much credit card interest could you pay on buy now, pay later debt?

Although paying off your BNPL debt with a credit card may be tempting, it could end up costing you more in the long run.

If you choose to pay off your BNPL debt with a credit card, you may have to pay credit card interest unless you are on an interest-free deal.

So if you had £75 in BNPL debt and you put this on a credit card charging 25% APR (the average interest rate on credit cards according to MoneyFacts), it would take 18 months to clear and you would pay £14 in interest, if you only made the minimum repayments (5% or £5, whichever is highest).

If you split the £75 into three instalments of £25 (how you often repay some BNPL schemes), with the same credit card terms specified above, it would take 18 months to clear with £11.99 charged in interest. 

Credit scores and late fees: what are the risks of using buy now, pay later?

As with all types of credit, there are risks if you miss BNPL repayments.

Your credit score could be impacted if you don’t pay your instalments and, if you continue to miss repayments, some BNPL providers will refer you to a debt collection agency.

Having a poor credit score could impact your ability to borrow in the future.

Though you won’t incur interest on your repayments, some BNPL schemes do charge late fees if you miss your repayments, meaning your purchase could end up costing far more than you’d planned.

Which? research has shown that almost a quarter of BNPL users spend more when using the schemes than they normally do. As most BNPL providers don’t run hard credit or affordability checks before lending you money, it’s important to make sure you can afford the repayments before committing.

What protections do I have if something goes wrong?

Unfortunately, you’re not covered by Section 75 protection when you use BNPL schemes, nor can you escalate a complaint to the Financial Ombudsman Service (FOS) like you can with other regulated credit products.

If you experience an issue with something you paid for with a BNPL scheme, such as a missing delivery or faulty item, you’ll need to look at the BNPL provider’s protection scheme instead.

Each BNPL firm will have its own policy for you to follow if you run into trouble with your purchase. Most ask that you try to resolve the problem directly with the retailer to begin with.

Which? has previously heard from customers who have been left waiting for refunds or for outstanding payments to be settled after returning unwanted items purchased with a BNPL scheme. One JD Sports customer waited over three weeks for a refund to come through after returning a pair of trainers.

If you find yourself in a similar situation or experience another type of issue with your purchase or repayment plan, you should contact the BNPL provider as soon as possible to ask them to freeze your upcoming payments.

Be sure to collect as much evidence as possible - such as photos of faulty items or failed deliveries and screenshots of messages from the retailer - in case you struggle to get it resolved.

What happens if the retailer I've bought from goes bust?

If you’ve bought something with a BNPL scheme and the retailer falls into administration, you’ll still have to continue meeting your repayments as normal if you want to keep the items.

This is because BNPL providers pay upfront for your items when you place your order - you are simply paying them back with your instalments.

When retailers go bust, the administrators can decide to stop honouring returns - meaning you could be stuck having to continue making repayments for items you don’t want.

Here’s what each provider told us you should do if you've paid with a BNPL scheme and are refused a refund:

• Klarna told us you should raise a dispute with it as normal and the company will let you know how it can offer support - this could include offering a refund for unwanted or damaged items.
• Laybuy told us that if the administrators decide to stop returns, you'll still have to make your repayments. If the situation is likely to cause you hardship, Laybuy will engage with you to find a solution such as an alternative repayment plan or pausing or cancelling repayments. Laybuy said it will write off the outstanding debt if the retailer doesn’t ship the goods at all.
• Clearpay told us it will refund you in accordance with your rights if you notify it that you intend to or have returned the goods. If you don’t receive your items, it will refund you or cancel your debt. It says you won’t ever be in a position where you’re out of pocket or lose your legal rights to return.
• PayPal says you can raise a dispute with PayPal Buyer Protection.
• Zilch says that as a regulated credit product, you’ll benefit from the same level of protections you’d get with more traditional types of credit if something goes wrong - such as Mastercard’s chargeback policy for refunds and Section 75 if the purchase is over £100.

What to do if you can’t pay your buy now, pay later debt

Here are our tips on what to do if you're struggling to pay back your BNPL payment plans.

1. Contact the buy now, pay later provider as soon as possible

You might be able to arrange an alternative repayment plan, or 'snooze' your repayments to kick in at a later date.

Here's what some of the main BNPL providers offer to customers concerned about repayments:

• Clearpay allows customers to move payments to a future date or add a breathing space to hold payments for a period of time. You can contact its customer service team to do so or move payments via the app or your online account.
• Klarna lets you pause repayments for 10 days (interest and fee-free) via the app. But it's also worth reaching out to Klarna directly to put an alternative repayment plan together if you're concerned about meeting your payments.
• Laybuy says it has a range of options available for customers who are struggling, including pausing or cancelling payments, changing payment days and reimbursing any late fees.
• PayPal will offer support such as amending repayment dates, depending on your circumstances.
• Zilch lets 'Pay over 6 weeks' customers use a snooze feature to delay an instalment by four days. You can only snooze a payment once per purchase – and you can’t snooze your first payment. If a customer does fall behind on repayments, Zilch will stop any further borrowing. It says it will also contact the customer to see how it can help and offer the option of a personalised payment plan.

2. Draw up a budget

This can help you get a clear picture of exactly how much money you can afford to pay back every month. Having an idea of your financial situation is also useful if you're looking to propose an alternative repayment plan with your BNPL provider.

• Find out more: how to budget

3. Don't overextend other borrowing

Think carefully about whether you'll be able to meet current BNPL repayments before applying for credit from other providers, or before taking out additional BNPL plans.

Debt can quickly spiral, so it's best to reach out to your BNPL provider to explain your situation before exploring other credit options.

Find out more: how to pay off your debts

4. Contact debt charities for support

There are a number of debt charities you can contact if you're struggling with your finances, including StepChange, MoneyHelper, Citizens Advice and National Debtline.

It's important to reach out for support - from your credit provider, debt charities or family and friends - if you're worried about debt.

• Find out more: Free debt advice contacts

Can I use buy now, pay later in-store?

With some retailers, you may be able to use BNPL schemes in-store.

You’re normally required to have an existing agreement or account with the BNPL provider, and you’ll need to access a portal on the provider’s app to make the transaction.

You’ll then be asked to generate a barcode via the app to present at the till.

While not all BNPL providers offer an in-store option, most are looking to expand into physical stores - so you might start noticing it more frequently when out at the shops.

Which? calls for urgent regulation of the sector

Most BNPL schemes aren’t currently regulated by the Financial Conduct Authority (FCA).

This means BNPL users have fewer protections if something goes wrong and BNPL providers don’t have to follow the same rules as other credit providers.

The government announced plans to regulate the sector in 2021 following a string of Which? investigations uncovering potential harm in the sector.

Some of our concerns include:

• BNPL users aren’t covered by Section 75 protection if something goes wrong with an order or purchase.
• BNPL users aren’t able to make an official complaint to the FOS if they’re unhappy with the service received by their BNPL provider.
• BNPL providers don’t have to run affordability checks on users - meaning consumers could end up taking more debt than they can afford.
• BNPL providers don’t have to report when customers miss payments - meaning other credit providers might lend to consumers without knowing they already have outstanding debts with BNPL firms and are struggling to make repayments.

But, concerningly, these plans to regulate the sector are yet to come into force.

Which? is still calling for the regulation of BNPL firms to ensure consumers are better protected when deciding to pay later at the checkout.