Buy now, pay later. Why these convenient payments could be putting you at risk!
In Europe, the rules for using Buy Now Pay Later to purchase are about to change, and this may have considerable ramifications for the rest of the financial world.
Going to a store, choosing a product, and leaving after paying only part of the bill, with the remainder spread over the next two or three months, is becoming increasingly popular. While this payment flexibility allows consumers to make purchases without emptying their wallets all at once, the rules are set to become stricter in the coming months. Not everyone will have access to this option anymore. The European Union has decided to amend the law regarding this matter in the 27 countries, including France.
How does Buy Now, Pay Later work? In both the UK and the US, Buy now, pay later (BNPL) allows consumers to make a purchase and delay payment. It typically involves dividing the total cost of a purchase into smaller, interest-free installments, often paid bi-weekly or monthly. Here's how it generally works in each country:
BNPL in the UK has become increasingly popular, thanks to providers like Klarna, Clearpay, and Laybuy. These providers partner with various retailers to offer their BNPL services at checkout. When making a purchase, consumers can select BNPL as a payment option. The cost of the purchase is then divided into several interest-free installments, with the first payment due at the time of purchase. Subsequent payments are automatically deducted from the customer's chosen payment method, typically on specified dates. While some BNPL providers may perform a soft credit check, approval rates are generally high in the UK.
BNPL in the US market is more fragmented, with multiple providers like Afterpay, Affirm, and Klarna competing for market share. The process is similar to the UK, where customers can choose BNPL at checkout and have their total purchase cost split into installments. However, the US market offers more flexibility in terms of installment duration, ranging from a few weeks to several months. Unlike the UK, in the US, consumers may have the option to choose between interest-free plans for shorter periods or longer-term financing with interest, depending on the provider. Credit checks may also vary, with some BNPL providers performing soft checks and others performing hard checks, depending on the purchase's cost and duration.
What are the risks of Buy Now, Pay Later? Buy Now, Pay Later (BNPL) services have gained popularity due to their convenience and flexibility, but they come with certain risks. One of the main concerns is the potential for overspending, as consumers may be tempted to make impulse purchases without a clear repayment plan. Late fees and high-interest rates can lead to increased costs, especially for those who miss payment deadlines. Moreover, BNPL can impact an individual's credit score, affecting their ability to secure loans or credit in the future. It's essential for users to carefully manage their BNPL obligations and understand the terms and conditions to avoid financial pitfalls and maintain good financial health.