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The pros and cons of 'buy now, pay later' credit

Not sure if 'buy now, pay later' is right for you? Find out with our guide to how it works and the pros and cons of point of sale credit.

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You’ve found the perfect pair of trainers online, but there’s only one pair in your size left. Even worse - it’s the week before payday and your bank balance is looking woeful. What do you do?

Not long ago, you’d have had no choice but to wait a few days and risk the shoes going out of stock, or to buy them and dive into your overdraft, jeopardising your finances. Not anymore.

PayPal Credit set the trend of letting people spread the cost of online purchases, describing themselves as “like a credit card, but without the plastic.” Lately, more and more shops, particularly furniture and electrical stores, have begun offering people the chance to pay off their purchase in chunks (just beware of rent-to-own products). Now, Klarna is the latest Swedish tech bank on the block, making it easier for you to buy now and pay later, particularly in the fashion space.

But, as the saying goes, there’s no such thing as a free lunch. Here, we explore the advantages and drawbacks of the popular payment trend (sometimes called ‘point of sale credit’) to help you make an informed decision.

So how does it work?

Thousands of shops accept PayPal Credit, giving you instant access to the stuff you love at a 0% interest rate. Spend £150 or more in one transaction, and if you pay it off within four months, you won’t pay any interest (after this period, the APR jumps to 17.9% variable). You’ll need to pay off at least the minimum balance as per your statement each month.

Similarly, Klarna work with more than 200,000 stores online and in-store to allow customers to ‘try before they buy’. If you're shopping online, simply order your goods as usual (up to the value of your credit limit) but select ‘Klarna’ as the payment method at the checkout. You then get 30 days to pay (depending on the shop), or you can repay it in instalments, giving you time to try out your order before you pay for it. Not keen on something? No problem. Just send it back and only pay for the things you keep - no waiting around for refunds!

Klarna also gives you the option to use financing if you can’t afford to repay your purchase in one go. Here, you can spread the cost of your order into equal monthly payments (plus interest at 18.9% APR variable).

Be wary of missed and late payments

‘Buy now, pay later’ can work brilliantly if you need something urgently but don’t have the cash to hand, as long as you’re confident you can make your repayments on time. Don’t worry - Klarna will send you an email telling you when and how to pay (handy if you’re the forgetful type), as well as text reminders when your payment is due.

The Klarna app makes it quick and easy to track when payments are due. You can even set up push notifications, snooze a payment for up to 10 days (interest and fee-free), report returns and contact Klarna at any time with 24/7 in-app chat.

PayPal also send you monthly reminders of when your payment is due, and you can set up a direct debit with them if you’d rather be safe.

The trouble starts if you miss a payment.

When this happens with Klarna's financing option, any promotional interest rates will be cancelled, and you’ll start being charged interest on repayments. You’ll be charged interest at 18.9% APR (variable), which means that jumper you found in the sale could turn out to be a lot pricier than you first thought. This isn't the case if you're paying later or in instalments however - you'll never be charged interest or fees.

If you use financing and forget your payment date and make a payment late, you could also be charged a fee. Likewise, PayPal will charge you a fee of £12 if you make a late payment (or if your payment is returned because you don’t have enough money in your account).

If you’ve ordered something and are worried about missing your payment, get in touch with Klarna’s customer service team or PayPal’s team on 0800 368 7155 to see if you can postpone it.

It can affect your credit score

When you choose to pay later with Klarna, they’ll run a soft search against your credit report. This will only be visible to you and won't affect your credit score. Neither using the 'pay later' method with Klarna nor missing a payment will hurt your credit score. For your credit file to be impacted, Klarna would have to submit missed payment information to the credit reference agency (CRA). Klarna doesn't report missed payments to the CRA in relation to these products. That means - to date - a customer’s credit score has never been impacted by using their ‘Pay later’ products, even if they fail to pay on time.

When you apply for financing with Klarna, they'll run a hard search against your report. This will show up on your report (to both you and anyone who looks at your report) and could damage your credit score. Missing or making a late payment if you're using the financing option could also harm your credit score. However, to date, less than 0.5% of Klarna UK customers have had their credit score impacted as a consequence of missing payments. (Again, your score won't be affected if you're using the 'pay later' or 'instalments' options, even if you fail to pay on time.)

Remember that a missed payment will show up on your credit report and will be visible to lenders if you apply for credit. Missed payments stay on your report for 6 years, and are a sign that you could be struggling financially. So not only could your credit score take a hit, but credit providers might be more hesitant to lend to you in the future.

Applying for PayPal Credit (or for financing with Klarna) could also affect your score, because the companies will run a hard search against your report which is visible to lenders. Unfortunately, PayPal give no indication as to whether you’ll be accepted before you apply, but the good news is they’ll only run a credit check against you the first time you apply.

If you’re not accepted for financing with Klarna or for PayPal credit, this will show up on your report. Don’t forget that that too many credit applications in a short space of time can bring your score down.

Not everyone is accepted

One of the downsides of choosing to buy now and pay later is that you might not even be able to. The nature of the service - taking on the retailer’s risk by letting you pay later - means that credit companies will only let you pay later if they think you’re a reliable borrower.

PayPal carry out creditworthiness and affordability checks when you apply for credit, looking at information held on you by credit reference agencies (such as your credit score and report). Before you apply, you’ll need to meet the eligibility criteria set by PayPal. If you’re declined, you’ll receive an email explaining why. You’ll be able to try again in the future, but not for at least 35 days after your first application.

Klarna assess your risk based on the very little information you’ve provided. Their model then looks at 140 different factors, including your geographical location, IP number, machine ID, and time of purchase. If the model flags you as a risky customer, you won’t be eligible to use Klarna and will have to pay upfront. (There are, however, a few things you can do to increase your chances of being able to pay later.)

If you want the convenience of being able to shop anywhere (physical shops included), and don’t mind waiting a few days for it to arrive, you could take out a credit card instead. With a 0% interest purchase card, you could pay no interest for over two years (just be sure to pay off your balance in full before the 0% interest period ends).

You could get into debt

If you have a tendency to shop late at night, spend uncontrollably, or regularly suffer from buyer’s remorse, we suggest you avoid buying now and paying later. Because these companies make it easier for you to shop now and worry about the money later, you could rack up debts that you can’t pay off - it’s just not worth it.

So if you don’t think you can repay the balance on time, either buy the goods upfront or not at all. You could also try Icebox, the Chrome extension that aims to put a stop to impulse buying.

There’s help out there if you’re struggling to manage your finances. Visit StepChange or the Money Advice Service for free, impartial advice on your money. If your finances are having an impact on your mental health (you're not alone), you can find support at Mind.

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