Buy Now Pay Later or credit card borrowing – choose what’s right for you

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Providers such as Swedish-owned Klarna and Australia’s Clearpay have mostly targeted younger consumers but more older shoppers are now using BNPL, too.

This new form of credit offers an affordable way to purchase what you want today and pay for it over a typical term of three months.

Typically, you do not have to pay any interest, provided you clear your borrowings in full and on time. 

It’s easier to get approved for BNPL finance than a traditional credit card, the worry is that it may be a bit too easy, so you must understand the potential risks.

If all goes well, BNPL shouldn’t cost you a penny more than the price of your original purchase, said Rajan Lakhani, money expert at smart money app Plum. “There are no interest or fees to pay, so long as you pay all of your instalments on time.”

Better still, the interest-free period is typically longer than the 55 days most credit cards give you to repay the money. 

BNPL lenders can afford to be more generous because they don’t purely earn money from interest, but also earn commission from retailers for boosting sales, Lakhani said. 

They don’t carry out a hard credit check, unlike credit cards, making borrowing easier, especially for those with past credit problems. 

There are penalties for missing payments although these are usually capped, Lakhani said. “It helps that BNPL is designed for relatively small purchases, in stark contrast to credit cards where debts can run to thousands of pounds.”

Missed BNPL payments will not affected your credit score, but that is changing as providers sign up with the big credit agencies, he added.

BNPL specialist Klarna argues that its credit products provide consumers with a healthier alternative to traditional credit. 

A spokesperson says it does not offer credit which can be postponed or “rolled over” indefinitely, in contrast to credit cards. 

The spokesperson said: “All our credit products have specific repayment schedules and we send multiple reminders to help our consumers stay on top of their payments.” 

If a customer falls behind on a payment Klarna will restrict the use of credit products until they are back on track, to stop debt building up.

It does not charge interest on any of its BNPL products and caps the maximum consumers will ever pay in late fees.

The first time a customer uses Klarna, it may lend them a small amount. For example, £100. If they pay back on time, it may lend a little bit more. “If at any time they fall behind on payments, we’ll dial it back.”

The average outstanding balance on BNPL is just £75 compared to £1,152 on a credit card, which further reduces risk.

It’s easier to get started with BNPL, said Laura Suter, head of personal finance at AJ Bell. “Most retailers have the option integrated at the checkout, giving you credit in a few clicks, while with a credit card you have to apply in advance, pass all the checks then wait for the card in the post.”

However, the “frictionless nature” of BNPL makes it far easier to get into problem debt, she cautioned.

If you put your spending on a credit card, you have just one payment to make at a set time each month. “If you use BNPL multiple times you could end up with lots of different payment dates and if you miss one you could be charged a fee.”

The big appeal of BNPL is that there is no interest to pay if handled correctly. However, the same could be said about a zero-interest introductory rate credit card.

Credit cards offer added consumer protection, too, Suter said. “Currently, BNPL is not authorised by the Financial Conduct Authority, so you cannot complain about providers to the Financial Ombudsman Service.”

Card purchases between £100 and £30,000 are also covered under Section 75 of the Consumer Credit Act, which protects shoppers if items are faulty or never arrive, or the supplier goes bust.

Credit cards may also offer rewards or cashback whereas BNPL does not. “Many people put all their spending on credit cards and pay the balance off in full each month, in order to benefit from cashback, air miles or other rewards.”

If you know that you can keep in control of your debt and pay off the balance, a zero-interest card can be a lucrative way of getting extras for your spending, Suter adds.

Both forms of credit have their advantages – as well as risks if you spend money you can’t afford to repay.

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