Is 'Buy Now, Pay Later' a Good Idea?

Tuesday, February 9, 2021

Who can forget the hook of Ariana Grande’s famous empowerment anthem 7 rings, and it's catchy chorus; ‘I want it, I got it’. Clearpay’s service ‘Love it. Get it….’ has that very same ring.

Never did spending money sound so upbeat, cheerful, and oh so easy.

Buy now, pay later services like Klarna, Laybuy and Clearpay have removed one of the main obstacles to spending – waiting for returns to be credited. But it's important to remember that these companies are still, well…lenders. In fact, a lot of people are not aware that Klarna is a bank.

Now, using a lender is not always a bad thing. Some have labelled this new era of lending as a ‘god send’; a smart way of sticking to your budget. However, when you use these services, there are a number of risk factors and consequences you should be aware of – including a reduced credit score.

Here are 4 factors to consider before diving in.

1.   Will I have enough money in following months?

If you can’t afford something this month, it makes sense you would want to push the payment to the next month. But the question is, will you really have money next month and thereafter? 

Many of us tend to falsely believe that our financial situation will improve in the near future, regardless of our actions. You can’t be sure of your financial situation months ahead. So, it’s important to try and keep long-term financial commitments low.

Do the math. Does this fit into my budget for the next month? Do I even have a budget?

If you are not able to pay – this can be a real blow to your financial wellbeing. If you miss a month, pay late, or pay too little you can wave goodbye to those ‘interest-free’ payments. You will not only still owe the money agreed for that month, but also late fees added onto it. In some cases, this can jump as high as 19% APR.

Ask yourself: how many financial commitments am I willing to keep piling up?

2.   Will it affect my credit score?

Recent research has shown that one in five UK shoppers used a buy now pay later scheme in 2019. One in five of them say it has negatively impacted their credit score. Your credit score is an important thing to keep your eye on as it can damage your ability to receive a bank loan in the future.

So, how does this actually happen? There are 2 main reasons.

 The first is if you apply for long-term financing when you have bad credit. If you have bad credit, it’s unlikely you will qualify for certain financing from Klarna and Paypal alike, however the mere act of applying and being rejected can hurt your score.

The second is, even if the service doesn’t do a credit check, your credit score can still be affected.

 For a number of pay later services, customers are reassured there will be no credit check. In the case of Klarna, instead, a “quotation search”with an external credit reference agency is performed. For others, like Clearpay where such a check is not performed – missed payments will still impact your credit score.

If you happen to miss a payment, this can stick to your record for 6 years, and reduce your chances of having a lender to lend to you in the future.

If you have a bad credit score, your best bet may be best to avoid these services altogether. If not, it could be a good idea, granted you sensibly consider the other 3 questions.

3.  Am I buying more than I can afford to keep?

One of the best benefits of using 'buy now, pay later' is the ability to stick to your budget for that month. Sometimes you may order items in several sizes, and know that you will only keep one. In these cases, 'buy now, pay later', can help you purchase the items you need without going into your overdraft, or into the 'red'.

But, we’ve all been there…

You’ve done a big clothes haul, the delivery’s free and you made use of 'buy now, pay later'. So, naturally, you order juuuust a little bit more than is sensible. And it all turns out great, so you keep it...all. That’s what makes these services so profitable. We buy more. That’s why retailers pay for services like Klarna, because they know that we are more likely to purchase more items if we can push it forward for our future self to deal with.

You may not be in debt, or financially challenged. However, even if you can technically afford the items you've purchased, you should always consider how this habit may impact your savings goals – and therefore your financial future.

 4.   Am I Purchasing a ‘Need’ or a ‘Want’?

If you are looking to purchase a necessity, then ‘Buy Now, Pay Later’ can be a brilliant tool.

This could be a necessary one-off purchase such as computer, or any long-term investment. In fact, most of us Brits have monthly payments for things like our phone contracts. This can help up balance out our budgets and keep unnecessary financials tress at bay.

However, if you are financing a want, you might want to think again. Do you really want to purchase an item that you cannot afford right now? Are there better ways you could be utilising that money? Perhaps towards long-term savings or a holiday fund?

Jay-Z may have had a point with his now famous quote:

“You can’t afford something unless you can buy it twice.”

Food for thought.

In Sum…

Pay later services like Klarna, Laybuy, Clearpay and their competitors can be of great use, especially for those looking to make one-off important purchases, order different variants of the same items, or simply balance their budget books.

However, safeguarding your credit score, being conscious of how much you're spending, and prioritising your savings – can go a long way in protecting you against some of the possible poor consequences.

As always, a little financial planning can go a long way.

Disclaimer: The content of this article is purely for informational purposes. The content reflects the opinion of the author. This article does not necessarily represent that of Wagebox Ltd, and we make no claims to the accuracy of the above information, and will not be liable for any errors or omissions it may display.